Chocolate makers Hershey Co and Ferrero SpA are considering a joint bid for Cadbury Plc that could help the British confectioner fend off a hostile takeover by Kraft Foods Inc.
A source familiar with the talks between U.S.-based Hershey and Italy's Ferrero said on Tuesday the discussions between the two sides were "very preliminary. Very early in the process."
The talks are the strongest sign yet of a possible rival bid to Kraft's $16.7 billion offer, which Cadbury rejected and said was "derisory".
The Wall Street Journal said Hershey might weigh a bid with Ferrero or on its own. Hershey has been in talks with JPMorgan Chase & Co and Bank of America Corp to line up financing for a potential bid for Cadbury, the newspaper reported on its online edition.
The newspaper said easing credit markets have emboldened Hershey that it could arrange the funding for a possible bid to counter Kraft's offer.
Ferrero and Cadbury both declined comment. Hershey and Hershey Trust officials could not immediately be reached.
Cadbury has not been contacted by Ferrero but would consider any attractive offer, a second source familiar with the situation told Reuters.
"Cadbury has heard nothing from Ferrero or people acting for it. Cadbury is not up for sale, but the company would give proper consideration to any offer that valued it properly and would be of interest to shareholders," the person said.
Although Cadbury's assets are very attractive, "it doesn't appear that either Ferrero or Hershey is in the financial position of taking on Cadbury all by themselves," said Erin Swanson, an equity analyst with Morningstar.
Hershey shares slipped 6 cents to $38.35 in extended trading on Tuesday following news of its talks with Ferrero. Earlier, the shares gained 1 cent to end at $27.64.
Ahead of the news, Cadbury shares closed up 0.8 percent at 788 pence on Tuesday. That was above Kraft's cash and stock offer, which is currently valued at about 718 pence.
Earlier on Tuesday, Italian business daily Il Sole 24 Ore said family-owned Ferrero, which makes Nutella chocolate spread and Ferrero Rocher chocolates, could join financial investors and private equity players considered friendly to Cadbury for a possible alliance.
"We believe that if this scenario were proposed as a potential defence measure by Cadbury, the potential value the market might be prepared to award it would not be materially different to that of a revised Kraft offer," at 820 pence per share, Nomura analyst Alex Smith said of a Cadbury-Ferrero combination.
Another advantage for Cadbury shareholders is that they would continue to hold shares in a high-growth confectionery group -- with a potentially retained UK listing -- rather than being paid around 50 percent equity in a low-growth US-listed conglomerate, Smith added.
Ferrero, which has annual sales of 6.2 billion euros ($9.3 billion), 18 factories and over 21,600 employees worldwide, is also known for its kinder chocolates and Tic-Tac candy.
Cadbury is the world's second-largest confectionery company after Mars-Wrigley, making brands such as Dairy Milk chocolate and Trident gum. It had full-year revenues of 5.4 billion pounds ($9.1 billion) in 2008.
Pietro Ferrero in Italy's northwestern province of Piedmont founded Ferrero in 1946. He invented Gianduja cream using local hazelnuts as an alternative to chocolate, which was in short supply after World War II.
His son Michele, named by Forbes magazine earlier this month as the richest man in Italy, took control in 1957 and his sons, Pietro and Giovanni, who are chief executives and live in Belgium, now run the company.