Buffett’s Kraft Stance Conjures Coke’s Quaker Retreat (Update1)

Jan. 5 (Bloomberg) -- Warren Buffett, who worked behind the scenes to undermine Coca-Cola Co.’s bid for Quaker Oats 10 years ago, has gone public to rein in Kraft Foods Inc.’s Irene Rosenfeld in her quest to acquire Cadbury Plc.

Buffett’s Berkshire Hathaway Inc., Kraft’s biggest shareholder, said today that Rosenfeld was seeking a “blank check” and urged fellow investors to oppose her plan to authorize the issuance of as many as 370 million shares. Northfield, Illinois-based Kraft, which has bid 10.6 billion pounds ($17 billion) for Cadbury, first announced its intention in September to buy the company.

“It’s unusual for Berkshire to put out any sort of comment like this publicly,” said Glenn Tongue, a partner at T2 Partners LLC, which holds investments in Omaha, Nebraska-based Berkshire and Kraft. Buffett’s opposition to a stock sale may prevent Kraft from overbidding, he said. “As a shareholder, I love seeing this,” he said.

Buffett, who has said shareholders need to act like owners, is calling for caution in negotiations after Cadbury said Kraft’s offer was insufficient. In publicly urging investors to join him, the 79-year-old Berkshire chairman is drawing on his power as a 9.4-percent owner of Kraft and the standing he’s gained in financial markets as the world’s preeminent investor.

“If he says no, everybody else is going to pile on and say no too,” said Justin Fuller, a partner at Midway Capital Research & Management who runs the buffettologist.com Web site.

Berkshire said it may support a Cadbury takeover if it concludes this month that the final offer “does not destroy value for Kraft shareholders.” Buffett’s assistant, Carrie Kizer, said the company had no comment.

‘Hemmed In’

“I think Buffett’s got it nailed,” said Donald Yacktman, founder of Yacktman Asset Management Co., which holds Kraft shares. “Kraft is hemmed in -- there’s only so much they’re going to be able to do to make this acquisition.”

Buffett was the most vocal dissenter on Coca-Cola’s board when directors met in 2000 to discuss a $15.3 billion bid for Quaker Oats, the maker of Gatorade, Cap’n Crunch cereal and Rice-A-Roni. Buffett argued the price was too high because a stock swap proposed as part of the deal would give up more than 10 percent of Atlanta-based Coca-Cola, board member James Williams said in an interview about three years later.

‘Very Scarce’

The board voted against the acquisition, and PepsiCo Inc. bought Quaker Oats in August 2001 for $14 billion. Berkshire remains the largest shareholder in Coca-Cola. Buffett’s company also holds the biggest stakes in American Express Co. and Wells Fargo & Co.

“I’m not surprised that Berkshire would resist issuing shares,” said Tom Russo, partner at Gardner Russo & Gardner, which holds Berkshire, Cadbury and Vevey, Switzerland-based Nestle. Buffett “has had the longstanding belief that equity capital is very scarce.”

Buffett won a global following as the “Oracle of Omaha” by profiting from investments in out-of-favor companies and firms he believes have unassailable advantages, including See’s Candies and ice-cream maker Dairy Queen. He agreed to buy $6.5 billion in debt and preferred shares in Wm. Wrigley Jr. Co. to help Mars Inc. acquire the chewing-gum maker in 2008. Last year, Berkshire bought stock in Kraft rival Nestle SA.

Pizza, Chewing Gum

Rosenfeld, CEO at Kraft since 2006, is seeking to buy the U.K.-based maker of Creme Eggs and Trident gum to expand its business outside the U.S. Kraft raised the cash portion of the Cadbury bid today after agreeing to sell pizza brands including DiGiorno and Tombstone to Nestle, the world’s largest food company.

Cadbury fell 3.2 percent to 779 pence in London, the biggest drop in eight months. Kraft added $1.34, or 4.9 percent, to $28.77 at 4:01 p.m. in New York Stock Exchange composite trading. That values Berkshire’s stake at more than $3.9 billion.

Buffett said in the statement that Kraft shares were “very expensive ‘currency’” after falling about 17 percent in the two years ended last week, and he criticized management for seeking to issue stock at current prices after repurchasing shares at $33 in 2007. Kraft executives “have to do a lot of things right to justify this price,” Buffett said in a September interview on CNBC.

“We agree that Kraft Foods shares are deeply undervalued,” the foodmaker said in a statement. “We intend to remain disciplined in this process.”

To contact the reporter on this story: Andrew Frye in New York at afrye@bloomberg.net

To contact the editor responsible for this story: Dan Kraut at dkraut2@bloomberg.net