By Tom Bradley 

There is an interesting business case playing out in the U.S. right now with Kraft Foods attempting to takeover Cadbury. The saga started 4 months ago when Kraft made a hostile bid. Cadbury’s board rejected the cash and shares offer, but by then the game was on. Nestle and Hershey came into the picture while Kraft remained steadfast in its pursuit.

To help get the deal closed, Kraft recently raised the cash component of its offer and is asking its own shareholders for approval to issue up to 370 million shares for the purpose of completing the deal.

Today there was news that Warren Buffett’s Berkshire Hathaway, Kraft’s largest shareholder, won’t give management a “blank cheque” to pursue the deal, and is voting against the share proposal.

This situation is a great illustration of one of Mr. Buffett’s most deeply held principles. If your shares are undervalued, don’t use them to buy another company’s fully-valued shares. It’s bad math and bad business.

Up until now, Berkshire has stayed quiet on the deal despite the fact that it thinks Kraft is significantly undervalued. That’s probably because Mr. Buffett loves the candy business and has confidence in Kraft management. But it appears they pushed him too far. The Berkshire release said that Kraft “is a very expensive ‘currency’ to be used in an acquisition”.

The most interesting comment today came from Kraft, which responded to Berkshire’s announcement by saying, “we agree that Kraft Foods shares are deeply undervalued and we would certainly not do anything that hurts shareholder value.”

What are they saying? Do they have candy in both sides of their mouth? It looks like they are already hell bent on diluting existing shareholders to expand their candy empire.