Oct. 29 (Bloomberg) -- Cadbury Plc shares are trading at their lowest levels since Kraft Foods Inc. offered to buy the U.K. candy maker, signaling increasing concern that a “knock- out” bid by the U.S. foodmaker may fail to materialize.

Cadbury was unchanged today at 773 pence after dropping for five straight days in London trading. The difference between Kraft’s offer, valuing the maker of Trident gum at 731 pence a share, and Cadbury’s stock price has narrowed by 50 percent from a Sept. 15 peak in the spread. Investors are less confident about a competing bid from companies such as Nestle SA or Hershey Co.

“We haven’t heard anything from the other rumored protagonists,” said William Hobbs, who helps manage 134 billion pounds ($222 billion) in assets, including Cadbury shares, at Barclays Wealth in London. “It would be very surprising if Kraft went for a knock-out bid when they come back if they’re not feeling any pressure from Nestle or Hershey.”

Most of Cadbury’s biggest holders, including funds managed by Morgan Stanley, Capital Group and Artisan Partners LP, have unloaded Cadbury shares since the Kraft offer was made public, according to U.K. regulatory filings. Franklin Resources Inc., the biggest holder, has boosted its stake to 8.1 percent from about 5.6 percent.

Kraft, based in Northfield, Illinois, has less than two weeks to come back with a formal offer for Cadbury after proposing a cash-and-stock takeover on Aug. 28, valued at 9.99 billion pounds based on today’s closing stock prices. A purchase would add Cadbury’s Dairy Milk chocolate to Kraft products including Oreo cookies and Philadelphia cream cheese.

Morgan Stanley, Capital Group, Artisan Partners and Franklin declined to comment through spokesmen.

Convincing Investors

“Kraft will probably raise their bid by as much as they can straight up, and walk away if it’s not good enough for investors,” said Keith Bowman, an analyst at Hargreaves Lansdown Plc in Bristol, England. Hargreaves holds Cadbury shares on behalf of private clients.

Cadbury investors may seek 850 pence to 900 pence a share, Bowman said. That’s as much as 23 percent above the offer value, based on Kraft’s closing share price today.

U.K. regulators have given Kraft until Nov. 9 to make a formal offer or stop its pursuit for six months.

Representatives for Kraft and Cadbury declined to comment.

Martin Deboo, an analyst at Investec Securities in London, cut his share-price estimate for Cadbury to 840 pence from 875 pence yesterday, citing a “growing possibility” that a deal won’t happen.

Sole Bidder?

“The most likely scenario is that Kraft will be the sole bidder and will take out Cadbury at a materially higher price than their initial indicative offer,” Deboo said. “But the probability also exists that Cadbury will remain independent, either because Kraft or others walk away, or because their final offer is not acceptable to shareholders.”

Deboo said he doubts Hershey’s “ability to pay and confidence in executing a deal of this size.” Nestle Chief Executive Officer Paul Bulcke said last month the company plans no major acquisitions this year or next.

A Hershey spokesman declined to comment.

Cadbury has dropped 4 percent from a record high of 805 pence on Sept. 28. At the same time, the benchmark FTSE 100 Index has slipped less than 1 percent and Kraft has gained 5.3 percent.

Kraft added 60 cents, or 2.2 percent, to $27.55 at 4:15 p.m. in New York Stock Exchange composite trading.

‘Short-Term Pain’

Cadbury’s recent earnings suggest the share price may climb to 900 pence by the end of next year as an independent company, said Brian Krawez, a senior research analyst for Scharf Investments in Santa Cruz, California, which holds Cadbury stock. He’s willing to hold out for a comparable price from Kraft and risk a share decline should the bidder walk away.

“We’d rather have a little short-term pain for long-term gain,” he said. “If Kraft are going to try and get it for 750 or 800, then no way.”

Cadbury rejected Kraft’s August proposal. In a letter dated Sept. 12, Cadbury called the proposal an “unappealing prospect” from a “low-growth” conglomerate.

Last week, Cadbury raised its full-year profitability and revenue forecasts on higher sales of Trident gum and Wispa Gold chocolate and the impact of its five-year turnaround program, fueling speculation that Kraft will have to raise its bid.

Full-year sales growth will be around the middle of a 4 percent to 6 percent range, instead of the lower end, Cadbury said Oct. 21. The operating margin will widen at least 1.35 percentage points, more than July’s forecast of 0.8 to 1 percentage point, it said. The confectioner also reported third- quarter sales that beat analysts’ estimates.

“Cadbury’s results might have strengthened the resolve of holders, especially those who’ve held for a while and want their money’s worth,” Hobbs at Barclays Wealth said. “Cadbury are probably going to get bought sooner or later, so there is cause to be disciplined and hold out for a decent price.”

To contact the reporters on this story: Andrew Cleary in London at acleary7@bloomberg.net; Duane D. Stanford in Atlanta at dstanford2@bloomberg.net; Zachary R. Mider in New York at zmider1@bloomberg.net.

Last Updated: October 29, 2009 17:39 EDT