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Filed by Kraft Foods Inc.

Pursuant to Rule 425

Under the Securities Act of 1933

Subject Company: Cadbury plc

Commission File No.: 333-06444

The following communications are available at www.transactioninfo.com/kraftfoods and/or www.kraftfoodscompany.com and/or were otherwise disseminated by Kraft Foods Inc. on December 18, 2009.

Forward-Looking Statements

These communications contain forward-looking statements regarding Kraft Foods’ offer to combine with Cadbury plc. Such statements include, but are not limited to, statements about the benefits of the proposed combination and other such statements that are not historical facts, which are or may be based on Kraft Foods’ plans, estimates and projections. These forward-looking statements are subject to a number of risks and uncertainties, many of which are beyond Kraft Foods’ control, that could cause Kraft Foods’ actual results to differ materially from those indicated in any such forward-looking statements. Such factors include, but are not limited to, failure to obtain necessary regulatory approvals or required financing or to satisfy any of the other conditions to the offer, and the risk factors set forth in Kraft Foods’ filings with the Securities and Exchange Commission (“SEC”), including the registration statement on Form S-4 filed by Kraft Foods in connection with the offer, Kraft Foods’ most recently filed Annual Report on Form 10-K and subsequent reports on Forms 10-Q and 8-K. Kraft Foods disclaims and does not undertake any obligation to update or revise any forward-looking statement in these communications, except as required by applicable law or regulation.

Additional US-Related Information

Each of these communications is provided for informational purposes only and is neither an offer to purchase nor a solicitation of an offer to sell shares of Cadbury plc or Kraft Foods. Kraft Foods has filed a registration statement and tender offer documents with the SEC in connection with the offer. Cadbury plc shareholders should read those filings, and any other filings made by Kraft Foods with the SEC in connection with the proposed combination, as they contain important information. Those documents, as well as Kraft Foods’ other public filings with the SEC, may be obtained without charge at the SEC’s website at www.sec.gov and at Kraft Foods’ website at www.kraftfoodscompany.com.

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

SCHEDULE 14A

Proxy Statement Pursuant to Section 14(a)

of the Securities Exchange Act of 1934

Filed by the Registrant  x

Filed by a Party other than the Registrant  ¨

Check the appropriate box:

 

¨        Preliminary Proxy Statement		¨        Confidential, for Use of the Commission Only (as permitted by Rule 14a-6(e)(2))
x       Definitive Proxy Statement
¨        Definitive Additional Materials
¨        Soliciting Material Under Rule 14a-12

KRAFT FOODS INC.

(Name of Registrant as Specified in its Charter)

(Name of Person(s) Filing Proxy Statement, if Other than the Registrant)

Payment of Filing Fee (Check the appropriate box):

 

¨	No fee required.

 

¨	Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.

 

1.

Title of each class of securities to which transaction applies:

 

2.

Aggregate number of securities to which transaction applies:

 

3.

Per unit price or other underlying value of transaction computed pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the filing fee is calculated and state how it was determined):

 

4.

Proposed maximum aggregate value of transaction:

 

5.

Total fee paid:

 

 

x	Fee paid previously with preliminary materials.

 

¨	Check box if any part of the fee is offset as provided by Exchange Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid previously. Identify the previous filing by registration statement number, or the Form or Schedule and the date of its filing.

 

1.

Amount previously paid:

  

2.

Form, Schedule or Registration Statement No.:

  

3.

Filing party:

  

4.

Date filed:

  

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IRENE B. ROSENFELD CHAIRMAN OF THE BOARD AND CHIEF EXECUTIVE OFFICER		THREE LAKES DRIVE NORTHFIELD, ILLINOIS 60093

December 18, 2009

Dear Fellow Shareholder:

You are cordially invited to attend a Special Meeting of Shareholders of Kraft Foods Inc. We will hold the Special Meeting at 9:00 a.m. CST on Monday, February 1, 2010, at the Hilton Chicago/Northbrook Hotel in Northbrook, Illinois. Registration at the Hilton Chicago/Northbrook Hotel will open at 8:00 a.m. CST.

At the Special Meeting, you will be asked to vote on a proposal to approve Kraft Foods issuing up to 370 million shares of our Class A common stock in connection with our proposed acquisition of Cadbury plc. We may use these shares to acquire all of the outstanding Cadbury share capital from Cadbury shareholders, to finance the Cadbury acquisition or for any other purposes related to the proposed acquisition. You will also be asked to vote on a proposal to approve any adjournment of the Special Meeting, including, if necessary, to solicit additional proxies in favor of the share issuance proposal if there are not sufficient votes for that proposal.

On December 4, 2009, we made an offer to acquire all of the outstanding Cadbury ordinary shares, including those represented by American Depositary Shares (ADSs). In this transaction, we will issue up to 370 million shares of our common stock and pay up to approximately £4.3 billion in cash in the aggregate in exchange for the Cadbury ordinary shares, including those represented by Cadbury ADSs.

In approving the new shares issuance, you are approving use of the shares in connection with the proposed Cadbury acquisition, regardless of the form of or procedures for the acquisition, and any related financing transaction.

The Board has unanimously determined that issuing shares of our common stock in connection with the proposed acquisition of Cadbury, including any related financing transaction, is in the best interest of Kraft Foods and its shareholders. The Board unanimously recommends that you vote for the share issuance proposal and the adjournment proposal.

Only shareholders of record at the close of business on December 14, 2009 are entitled to vote at the Special Meeting or any adjournments or postponements of the Special Meeting.

You may vote your shares via the Internet or by calling a toll-free number. If you received a paper copy of the proxy card or voting instruction form by mail, you may sign, date and mail your properly executed proxy card or voting instruction form. Or you may vote in person at the Special Meeting. We include instructions about each option in the attached Proxy Statement and on the enclosed proxy card or voting instruction form. Your vote is important to us. Whether or not you plan to attend the Special Meeting, I encourage you to vote promptly.

Please register in advance if you would like to attend the Special Meeting. The pre-registration directions are provided in the attached Proxy Statement.

On behalf of the Board, thank you for your continued interest and support.

Sincerely,

Irene B. Rosenfeld

Chairman of the Board and

Chief Executive Officer

 

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KRAFT FOODS INC.

Three Lakes Drive

Northfield, Illinois 60093

 

 

NOTICE OF SPECIAL MEETING OF SHAREHOLDERS

OF KRAFT FOODS INC.

 

 

 

TIME AND DATE:		9:00 a.m. CST on Monday, February 1, 2010.
PLACE:		Hilton Chicago/Northbrook Hotel 2855 N. Milwaukee Ave. Northbrook, IL 60062
ITEMS OF BUSINESS:		(1)    To vote on a proposal to approve issuing up to 370 million shares of Kraft Foods Inc. Class A common stock in connection with our proposed acquisition of Cadbury plc, including any issuance of shares of Kraft Foods Inc. Class A common stock to finance the proposed acquisition.   (2)    To vote on a proposal to approve any adjournment of the Special Meeting, including, if necessary, to solicit additional proxies in favor of Item 1 if there are not sufficient votes for such proposal.   (3)    To transact other business properly presented at the Special Meeting.
BOARD RECOMMENDATION:		The Board has unanimously determined that issuing shares of our common stock in connection with the proposed acquisition of Cadbury, including any related financing transaction, is in the best interest of Kraft Foods and its shareholders. The Board recommends that shareholders vote for Items 1 and 2.
WHO MAY VOTE:		Shareholders of record at the close of business on December 14, 2009.
DATE OF DISTRIBUTION:		We are mailing the Proxy Statement on or near December 21, 2009.
MATERIALS AVAILABLE ON OUR WEB SITE:		This Notice of Special Meeting and the Proxy Statement are available at www.kraftfoodscompany.com. Information included on our web site, other than these materials, is not part of the proxy soliciting materials.

Carol J. Ward

Vice President and Corporate Secretary

December 18, 2009

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		Page
QUESTIONS AND ANSWERS ABOUT THE SPECIAL MEETING AND VOTING		1
SUMMARY		8
The Companies		8
The Offer		8
Possible Equity Financing		9
Recommendation of our Board		9
Conditions of the Offer		10
Interests of Kraft Foods and Our Executive Officers and Directors in the Share Issuance		10
Accounting Treatment		10
Regulatory Approvals		10
Risk Factors		10
NOTE ON CADBURY INFORMATION		11
CURRENCIES		12
EXCHANGE RATE INFORMATION		13
FORWARD-LOOKING STATEMENTS		14
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA OF KRAFT FOODS		15
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA OF CADBURY		17
SELECTED UNAUDITED PRO FORMA COMBINED FINANCIAL DATA		19
HISTORICAL AND PRO FORMA PER SHARE DATA		21
COMPARATIVE MARKET PRICE AND DIVIDEND INFORMATION		23
RISK FACTORS		25
Risk Factors Relating to the Proposed Cadbury Acquisition and the Offer		25
Risk Factors Relating to Our Business and the Business of the Combined Company		28
Risk Factors Relating to Cadbury’s Business		34
THE SPECIAL MEETING		35
Time, Date, Place and Purpose		35
Record Date and Shares Entitled to Vote		35
Voting Procedures		35
Quorum		36
Vote Required		36
Proxy Solicitation		36
Change of Vote and Revocation of Proxies		37
Kraft Foods’ Auditors		37
ITEM 1     ISSUANCE OF SHARES OF OUR COMMON STOCK IN CONNECTION WITH OUR PROPOSED ACQUISITION OF CADBURY		38
General		38
Effect of Shareholder Approval		39
Registration Statement		39
Preemptive Rights		40
Appraisal/Dissenters’ Rights		40
Recommendation of the Board		40
Reasons for the Cadbury Acquisition and Share Issuance		40
Timing of the Cadbury Acquisition		41

 

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(Continued)

 

		Page
ITEM 2    ADJOURNMENT OF THE SPECIAL MEETING		42
THE COMPANIES		43
Kraft Foods		43
Cadbury		44
BACKGROUND OF THE PROPOSED CADBURY ACQUISITION		45
THE OFFER		52
Terms of the Offer		52
Conditions of the Offer		52
Accounting Treatment		53
Ownership of Kraft Foods After Completion of the Cadbury Acquisition		54
Federal Income Tax Consequences of the Share Issuance		54
Regulatory Approvals		55
Financing of the Cadbury Acquisition		56
CERTAIN RELATIONSHIPS WITH CADBURY AND INTERESTS OF OUR DIRECTORS AND EXECUTIVE OFFICERS IN THE SHARE ISSUANCE		57
OWNERSHIP OF EQUITY SECURITIES		58
UNAUDITED U.S. GAAP PRO FORMA FINANCIAL INFORMATION		60
SUMMARY OF SIGNIFICANT DIFFERENCES BETWEEN IFRS AND U.S. GAAP		72
WHERE YOU CAN FIND MORE INFORMATION		75
INCORPORATION BY REFERENCE		76
SHAREHOLDER PROPOSALS FOR THE 2010 ANNUAL MEETING OF SHAREHOLDERS		78
OTHER MATTERS		78

 

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NOTE ON CADBURY INFORMATION

We have taken all information (other than certain information concerning Cadbury share options) concerning Cadbury, its business, management and operations presented or incorporated by reference in this Proxy Statement from publicly available information. This information may be examined and copies may be obtained at the places and in the manner set forth in “Where You Can Find More Information” on page 75 of this Proxy Statement. We are not affiliated with Cadbury, and we have not had the cooperation of Cadbury’s management or due diligence access to Cadbury or its business or management for the purposes of preparing this Proxy Statement. Therefore, non-public information concerning Cadbury’s business and financial condition was not available to us for the purpose of preparing this Proxy Statement. Although we have no knowledge that would indicate that any information or statements relating to Cadbury contained or incorporated by reference in this Proxy Statement are inaccurate or incomplete, we were not involved in the preparation of the information or the statements and cannot verify them.

We refer to Kraft Foods and its subsidiaries, including Cadbury and its subsidiaries, after completion of the Cadbury acquisition, as the combined company. Any financial information regarding Cadbury that may be detrimental to the combined company and that has not been publicly disclosed by Cadbury, or errors in our estimates due to the lack of cooperation from Cadbury, may have an adverse effect on the benefits we expect to achieve through the consummation of the Cadbury acquisition.

Pursuant to Rule 409 under the Securities Act of 1933, as amended, and Rule 12b-21 under the Exchange Act, we have requested that Cadbury provide us with information required for complete disclosure regarding Cadbury’s businesses, operations, financial condition and management. Our legal advisors received a letter dated December 15, 2009 in which Cadbury rejected our request. However, if we receive the information before the Special Meeting and we consider it to be material, reliable and appropriate, then we will amend or supplement this Proxy Statement to provide this information.

 

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CURRENCIES

In this Proxy Statement, unless otherwise specified or the context otherwise requires:

 

•

“pounds sterling,” “pounds,” “sterling,” “U.K. pounds,” “£,” “pence” or “p” each refer to the lawful currency of the United Kingdom;

 

•

“U.S. dollars,” “dollars” or “$” each refer to the lawful currency of the United States; and

 

•

“euro” or “€” each refer to the currency introduced at the start of the third stage of European economic and monetary union pursuant to the Treaty establishing the European Community, as amended.

We publish our financial statements in U.S. dollars and Cadbury publishes its financial statements in pounds sterling. Certain Kraft Foods and Cadbury financial information included in this Proxy Statement was translated using company specific exchange rates. In preparing our financial statements, we translated the results of operations of our foreign subsidiaries into U.S. dollars using average exchange rates during each period indicated. We translated balance sheet accounts into U.S. dollars using exchange rates at the end of each period indicated. According to Cadbury’s public filings, in preparing its financial statements, Cadbury translated the balance sheets of its non-U.K. subsidiaries into pounds sterling using exchange rates at the end of each period indicated. Cadbury translated the results of its non-U.K. subsidiary undertakings into pounds sterling at an average rate, calculated using the exchange rates prevailing at the end of each month during the applicable period presented. We are not making any representation to you regarding those translated amounts.

Please see the section of this Proxy Statement entitled “Exchange Rate Information” for additional information regarding the exchange rates between pounds sterling and the U.S. dollar.

 

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EXCHANGE RATE INFORMATION

The following table shows, for the periods indicated, information concerning the exchange rate between U.S. dollars and pounds sterling. The information in the following table is expressed in U.S. dollars per pound sterling and is based on the noon buying rate in New York City for cable transfers in pounds sterling as certified for customs purposes by the Federal Reserve Bank of New York. The average rates for the monthly periods presented in these tables were calculated by taking the simple average of the daily noon buying rates. The average rates for the interim periods and annual periods presented in these tables were calculated by taking the simple average of the noon buying rates on the last day of each month during the relevant period.

On December 14, 2009, the latest practicable date for which such information was available prior to the printing of this Proxy Statement, the noon buying rate was $1.624 per £1.00. These translations should not be construed as a representation that the U.S. dollar amounts actually represent, or could be converted into, pounds sterling at the rates indicated.

 

		Period-end Rate			Average Rate			High			Low
Recent Monthly Data
November 2009		$	1.648		$	1.660		$	1.680		$	1.638
October 2009			1.648			1.621			1.661			1.588
September 2009			1.600			1.632			1.670			1.591
August 2009			1.631			1.653			1.698			1.621
July 2009			1.671			1.638			1.671			1.603
June 2009			1.645			1.637			1.655			1.598
May 2009			1.616			1.542			1.616			1.488
April 2009			1.480			1.471			1.499			1.440
March 2009			1.430			1.417			1.473			1.376
February 2009			1.428			1.442			1.494			1.422
January 2009			1.441			1.446			1.525			1.366
December 2008			1.462			1.485			1.546			1.440
November 2008			1.535			1.533			1.616			1.479
Interim Period Data
Nine months ended September 30, 2009		$	1.600		$	1.544		$	1.698		$	1.366
Six months ended June 30, 2009			1.645			1.494			1.655			1.366
Nine months ended September 30, 2008			1.780			1.947			2.031			1.750
Six months ended June 30, 2008			1.991			1.975			2.031			1.941
Annual Data (Year ended December 31,)
2008		$	1.462		$	1.854		$	2.031		$	1.440
2007			1.984			2.002			2.110			1.924
2006			1.959			1.843			1.979			1.726
2005			1.719			1.815			1.929			1.714
2004			1.916			1.836			1.948			1.754

 

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FORWARD-LOOKING STATEMENTS

Certain statements contained or incorporated by reference in this Proxy Statement may constitute “forward-looking statements.” All statements in this Proxy Statement, other than those relating to historical information or current condition, are forward-looking statements. These forward-looking statements are subject to a number of risks and uncertainties, many of which are beyond our control, that could cause our actual results to differ materially from those indicated in any such statements. Such factors include, but are not limited to, continued volatility of input costs, pricing actions, increased competition, our ability to differentiate our products from retailer brands, unanticipated expenses in connection with litigation, settlement of legal disputes, regulatory investigations or enforcement actions, our indebtedness and ability to pay our indebtedness, the shift in consumer preference to lower priced products, risks from operating outside the United States, tax law changes, failure to obtain necessary regulatory approvals or required financing or to satisfy any of the other conditions of the proposed acquisition of Cadbury, adverse effects on the market price of our common stock and on our operating results because of a failure to complete the proposed acquisition, failure to realize the expected benefits of the proposed acquisition, significant transaction costs and/or unknown liabilities and general economic and business conditions that affect the combined company following the completion of the proposed acquisition. For more information on these and other factors that could affect our forward-looking statements, please also see the section of this Proxy Statement entitled “Risk Factors” and the risk factors in our filings with the SEC, including our most recently filed Annual Report on Form 10-K and subsequent reports on Forms 10-Q and 8-K incorporated by reference herein. We disclaim and do not undertake any obligation to update or revise any forward-looking statement in this Proxy Statement except as required by applicable law or regulation.

 

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SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA OF KRAFT FOODS

The following table sets forth the selected historical consolidated financial and operating data of Kraft Foods for the nine-month periods ended September 30, 2009 and 2008 and for each of the years in the five-year period ended December 31, 2008. The following data have been derived from the annual audited consolidated financial statements, including the consolidated balance sheets at December 31, 2008 and 2007 and the related consolidated statements of income and of cash flows for each of the three years in the period ended December 31, 2008 and notes thereto; and the unaudited Selected Financial Data Summary contained in Kraft Foods’ Current Report on Form 8-K filed with the SEC on November 3, 2009. The data for the nine months ended September 30, 2009 and 2008 have been derived from unaudited consolidated financial statements of Kraft Foods contained in Kraft Foods’ Quarterly Report on Form 10-Q for the quarter ended September 30, 2009, and which, in the opinion of management, include all adjustments, consisting only of normal recurring adjustments, necessary for a fair statement of the results for the unaudited interim periods. All historical financial information presented with respect to Kraft Foods is prepared in accordance with U.S. GAAP, which differs from International Financial Reporting Standards (“IFRS”) in a number of significant respects. For a general discussion of the significant differences between IFRS and U.S. GAAP, please see the section of this Proxy Statement entitled “Summary of Significant Differences Between IFRS and U.S. GAAP.” Historical results are not indicative of the results to be expected in the future and results of interim periods are not necessarily indicative of results for the entire year.

This summary information is derived from and should be read in conjunction with the financial statements and related notes incorporated by reference into this Proxy Statement, as described in “Incorporation by Reference” on page 76 of this Proxy Statement.

 

		Nine months ended September 30,								Year ended December 31,
		2009				2008				2008				2007				2006				2005				2004
		(in millions, except for per share and employee data)
Summary of Operations:
Net revenues		$	29,361			$	31,251			$	41,932			$	35,858			$	33,018			$	32,779			$	30,859
Cost of sales			18,890				20,777				28,088				23,656				21,190				21,115				19,474
Operating income			4,218				3,513				3,843				4,176				4,158				4,373				4,327
Operating margin			14.4	%			11.2	%			9.2	%			11.6	%			12.6	%			13.3	%			14.0	%
Interest and other expense, net			915				934				1,240				604				510				635				666
Earnings from continuing operations before income taxes			3,303				2,579				2,603				3,572				3,648				3,738				3,661
Provision for income taxes			986				834				755				1,080				816				1,066				1,165
Earnings / (loss) from discontinued operations, net of income taxes			—				968				1,045				232				233				(33	)			219
Net earnings			2,317				2,713				2,893				2,724				3,065				2,639				2,715
Noncontrolling interest			6				7				9				3				5				3				3
Net earnings attributable to Kraft Foods			2,311				2,706				2,884				2,721				3,060				2,636				2,712
Basic EPS attributable to Kraft Foods:
Continuing operations			1.56				1.15				1.22				1.56				1.70				1.57				1.45
Discontinued operations			—				0.63				0.70				0.15				0.14				(0.02	)			0.13
Net earnings attributable to Kraft Foods			1.56				1.78				1.92				1.71				1.84				1.55				1.58
Diluted EPS attributable to Kraft Foods:
Continuing operations			1.56				1.14				1.21				1.56				1.70				1.57				1.45
Discontinued operations			—				0.63				0.69				0.14				0.14				(0.02	)			0.13
Net earnings attributable to Kraft Foods			1.56				1.77				1.90				1.70				1.84				1.55				1.58
Dividends declared per share			0.87				0.83				1.12				1.04				0.96				0.87				0.77
Dividends declared as a % of Basic EPS			55.8	%			46.6	%			58.3	%			60.8	%			52.2	%			56.1	%			48.7	%
Dividends declared as a % of Diluted EPS			55.8	%			46.9	%			58.9	%			61.2	%			52.2	%			56.1	%			48.7	%

 

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SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA OF KRAFT FOODS (con’t)

 

		Nine months ended September 30,				Year ended December 31,
		2009		2008		2008		2007		2006		2005		2004
		(in millions, except for per share and employee data)
Weighted-average shares—Basic		1,477		1,516		1,505		1,591		1,659		1,699		1,720
Weighted-average shares—Diluted		1,485		1,527		1,515		1,600		1,661		1,699		1,720
Net cash provided by operating activities		3,269		2,529		4,141		3,571		3,720		3,464		4,008
Capital expenditures		749		901		1,367		1,241		1,169		1,171		1,006
Depreciation		644		734		963		873		884		869		868
Property, plant and equipment, net		10,409		10,638		9,917		10,778		9,693		9,817		9,985
Inventories, net		4,073		4,792		3,881		4,238		3,436		3,272		3,365
Total assets		66,669		67,029		63,173		68,132		55,548		57,597		59,905
Long-term debt		18,108		18,874		18,589		12,902		7,081		8,475		9,723
Total debt		20,725		20,593		20,251		21,009		10,821		11,200		12,518
Total long-term liabilities		29,402		30,176		29,773		23,574		16,520		19,285		20,903
Total Kraft Foods Shareholders’ Equity		25,125		—		22,295		27,407		28,536		29,574		29,888
Total Equity		25,211		26,554		22,356		27,445		28,562		29,600		29,924
Book value per common share outstanding		17.02		18.08		15.18		17.87		17.44		17.71		17.53
Market price per common share—high / low		29.84/20.81		34.97/28.04		34.97/24.75		37.20/29.95		36.67/27.44		35.65/27.88		36.06/29.45
Closing price of common share at period end		26.27		32.75		26.85		32.63		35.70		28.17		35.61
Price / earnings ratio at period end—Basic		17		18		14		19		19		18		23
Price / earnings ratio at period end—Diluted		17		19		14		19		19		18		23
Number of common shares outstanding at period end		1,476		1,469		1,469		1,534		1,636		1,670		1,705
Number of employees		N/A		N/A		98,000		103,000		90,000		94,000		98,000

 

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SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA OF CADBURY

The following table sets forth the selected historical consolidated financial and operating data of Cadbury for the six-month periods ended June 30, 2009 and 2008 and for each of the years in the five-year period ended December 31, 2008.

We are not affiliated with Cadbury, and we have not had the cooperation of Cadbury’s management or due diligence access to Cadbury or its business or management for the purposes of preparing this Proxy Statement. Therefore, non-public information concerning Cadbury’s business and financial condition was not available to us for the purpose of including selected historical consolidated financial data of Cadbury for the nine-month period ended September 30, 2009. We have requested current financial information from Cadbury, including financial information for the nine-month period ended September 30, 2009. Our legal advisors received a letter dated December 15, 2009 in which Cadbury rejected our request. However, if we do receive such information in a timely manner, we would include selected historical consolidated financial data of Cadbury for the nine-month period ended September 30, 2009 in this Proxy Statement.

The information with respect to the six months ended June 30, 2009 and 2008 has been derived from the unaudited consolidated financial statements of Cadbury contained in Cadbury’s Report on Form 6-K furnished to the SEC on July 29, 2009. The following data, insofar as it relates to each of the years 2004 through 2008, have been derived from annual consolidated financial statements, including the consolidated balance sheets at December 31, 2008 and 2007 and the related consolidated statements of income and of cash flows for each of the three years in the period ended December 31, 2008 and notes thereto contained in Cadbury’s Annual Report on Form 20-F for the year ended December 31, 2008. All historical financial information presented with respect to Cadbury is prepared in accordance with IFRS. Cadbury’s consolidated financial statements were prepared in pounds sterling and in accordance with IFRS, which differs from U.S. GAAP in a number of significant respects. For a general discussion of the significant differences between IFRS and U.S. GAAP, please see the section of this Proxy Statement entitled “Summary of Significant Differences Between IFRS and U.S. GAAP.” Historical results are not indicative of the results to be expected in the future and results of interim periods are not necessarily indicative of results for the entire year.

 

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SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA OF CADBURY (con’t)

This summary information is derived from and should be read in conjunction with the financial statements and related notes incorporated by reference into this Proxy Statement, as described in “Incorporation by Reference” on page 76 of this Proxy Statement.

 

		Six months ended June 30,						Year ended December 31,
		2009			2008			2008			2007			2006			2005			2004
		(in millions of pounds sterling, except for per share data)
Continuing Operations
Revenue		2,767			2,440			5,384			4,699			4,483			4,295			3,990
Trading costs		(2,462	)		(2,226	)		(4,803	)		(4,258	)		(4,071	)		(3,799	)		(3,576	)
Restructuring costs		(105	)		(70	)		(194	)		(165	)		(107	)		(62	)		(110	)
Non-trading items		1			(6	)		1			2			23			5			17
Profit from Operations		201			138			388			278			328			439			321
Share of result in associates		3			4			10			8			(15	)		13			11
Profit before financing and taxation		204			142			398			286			313			452			332
Investment revenue		18			28			52			56			50			45			51
Finance costs		(110	)		(36	)		(50	)		(88	)		(119	)		(174	)		(196	)
Profit before taxation		112			134			400			254			244			323			187
Taxation		(33	)		26			(30	)		(105	)		(68	)		24			11
Profit for the period from continuing operations		79			160			370			149			176			347			198
Discontinued operations(1)
(Loss)/profit for the period from discontinued operations		234			(47	)		(4	)		258			989			429			349
Profit for the period		313			113			366			407			1,165			776			547
Attributable to:
Equity holders of the parent		313			113			364			405			1,169			765			525
Minority interests		—						2			2			(4	)		11			22
		313			113			366			407			1,165			776			547
Earnings per share
From continuing and discontinued operations
Basic		23.1p			6.0p			22.6p			19.4p			56.4p			37.3p			25.9p
Diluted		23.1p			6.0p			22.6p			19.2p			55.9p			36.9p			25.7p
From continuing operations
Basic		5.8p			8.5p			22.8p			7.0p			8.7p			16.4p			8.7p
Diluted		5.8p			8.5p			22.8p			7.0p			8.6p			16.2p			8.6p
Earnings per ADR(2)
From continuing and discontinued operations
Basic		92.4p			24.0p			90.4p			77.6p			225.6p			149.2p			103.6p
Diluted		92.4p			24.0p			90.4p			76.8p			223.6p			147.6p			102.8p
From continuing operations
Basic		23.2p			34.0p			91.2p			28.0p			34.8p			65.6p			34.8p
Diluted		23.2p			34.0p			91.2p			28.0p			34.4p			64.8p			34.4p

 

(1)

Cadbury’s beverage businesses in Europe and South Africa were sold in 2006. In 2008, Cadbury completed the demerger of its Americas Beverages business and announced it had entered into a conditional agreement to sell the Australia Beverages business. On March 12, 2009, Cadbury entered into a definitive sale and purchase agreement for the sale of Australia Beverages. All of these businesses have been classified as discontinued operations and the 2004 to 2007 financial information has been re-presented accordingly.

 

(2)	Each Cadbury ADR (i.e., ADS) represents four ordinary shares.

 

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SELECTED UNAUDITED PRO FORMA COMBINED FINANCIAL DATA

The following selected unaudited pro forma financial data for the year ended December 31, 2008 and for the six-month period ended June 30, 2009, the date of the latest publicly available financial information of Cadbury, show the effect of the Cadbury acquisition on Kraft Foods’ results of operations as if it had occurred on January 1, 2008. The following unaudited pro forma balance sheet data at June 30, 2009 show the effect of the Cadbury acquisition on Kraft Foods’ financial position as if it had occurred on that date.

We are not affiliated with Cadbury, and we have not had the cooperation of Cadbury’s management or due diligence access to Cadbury or its business or management for the purposes of preparing this Proxy Statement. Therefore, non-public information concerning Cadbury’s business and financial condition was not available to us for the purpose of presenting pro forma combined financial data for the nine-month period ended September 30, 2009. We have requested current financial information from Cadbury, including financial information for the nine-month period ended September 30, 2009. Our legal advisors received a letter dated December 15, 2009 in which Cadbury rejected our request. However, if we do receive such information in a timely manner, we would compile pro forma combined financial data for the nine-month period ended September 30, 2009 and include it in this Proxy Statement.

The unaudited pro forma financial data included in this Proxy Statement are based on the historical financial statements of Kraft Foods and Cadbury, and on publicly available information and certain assumptions that we believe are reasonable, which are described in the notes to the “Unaudited U.S. GAAP Pro Forma Financial Information” included in this Proxy Statement. Significantly, we have not performed any due diligence or detailed valuation analysis necessary to determine the fair market values of the Cadbury assets to be acquired and liabilities to be assumed. Accordingly, the pro forma financial statements do not include an allocation of the purchase price, unless specified otherwise.

The information in the following table has been derived from the unaudited consolidated financial statements of Kraft Foods contained in Kraft Foods’ Quarterly Report on Form 10-Q for the quarter ended June 30, 2009, the audited consolidated financial statements of Kraft Foods contained in Kraft Foods’ Current Report on Form 8-K filed with the SEC on November 3, 2009, the unaudited consolidated financial statements of Cadbury contained in Cadbury’s Report on Form 6-K furnished to the SEC on July 29, 2009 and the audited consolidated financial statements of Cadbury contained in Cadbury’s Annual Report on Form 20-F for the year ended December 31, 2008.

We have translated the Cadbury figures in this section from pounds sterling into U.S. dollars using average exchange rates applicable during the periods presented for the unaudited pro forma consolidated statements of earnings and the period end exchange rate for the unaudited pro forma consolidated balance sheet, as described in the section of this Proxy Statement entitled “Unaudited U.S. GAAP Pro Forma Financial Information.”

Cadbury’s consolidated financial statements are prepared in accordance with IFRS, which differs in a number of significant respects from U.S. GAAP. For a general discussion of the significant differences between IFRS and U.S. GAAP, please see the section of this Proxy Statement entitled “Summary of Significant Differences Between IFRS and U.S. GAAP.”

The following should be read in connection with the section of this Proxy Statement entitled “Unaudited U.S. GAAP Pro Forma Financial Information,” and other information included in or incorporated by reference into this Proxy Statement.

 

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SELECTED UNAUDITED PRO FORMA COMBINED FINANCIAL DATA (con’t)

The following pro forma financial information is presented for illustrative purposes only and is not necessarily indicative of the results of operations and financial position that would have been achieved had the consummation of the acquisition taken place on the date indicated or of the future operations of the combined company. The following table should be relied on only for the limited purpose of presenting what the results of operations and financial position of the combined businesses of Kraft Foods and Cadbury might have looked like had the acquisition been consummated at an earlier date. For a discussion of the assumptions and adjustments made in the preparation of the pro forma financial information presented in this Proxy Statement, please see the section of this Proxy Statement entitled “Unaudited U.S. GAAP Pro Forma Financial Information.”

 

		For the six months ended June 30, 2009				For the year ended December 31, 2008
		Pro Forma Combined
		(in millions, except percentages and per share data)
Statement of Operations
Net revenues		$	23,656			$	52,031
Cost of sales			14,819				33,478
Operating income			3,027				4,467
Operating margin			12.8	%			8.6	%
Interest and other expense, net			806				1,443
Earnings from continuing operations before income taxes			2,221				3,024
Provision for income taxes			722				717
Earnings from continuing operations attributable to shareholders			1,495				2,294
Basic earnings per share from continuing operations			0.81				1.23
Diluted earnings per share from continuing operations			0.81				1.22
Weighted-average shares—Basic			1,842				1,871
Weighted-average shares—Diluted			1,850				1,881

 

		As of June 30, 2009 Pro forma combined
		(in millions, except per share data)
Balance Sheet Data
Property, plant and equipment, net		$	13,057
Inventories, net			5,407
Total assets			89,875
Long-term debt			27,521
Total debt			30,334
Total long-term liabilities			41,354
Total Shareholders’ Equity			33,675
Total Equity			33,771
Book value per share outstanding			18.29
Number of shares outstanding at period end			1,841

 

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HISTORICAL AND PRO FORMA PER SHARE DATA

The table set forth below depicts the basic and diluted earnings per share, cash dividends declared per share and book value per share for (a) Kraft Foods and Cadbury on a historical basis, (b) the combination of Kraft Foods and Cadbury on a pro forma combined basis and (c) Cadbury in comparison with the equivalent pro forma net income and book value per share attributable to 0.2589 of a share of Kraft Foods common stock that will be received for each Cadbury ordinary share, including each share represented by a Cadbury ADS, exchanged in the Cadbury acquisition, based on the average exchange rate for the period. The pro forma data of the combined company were derived by combining the historical consolidated financial information of Kraft Foods and using the acquisition method of accounting for business combinations as described in the section of this Proxy Statement entitled, “The Offer—Accounting Treatment.” For a discussion of the assumptions and adjustments made in the preparation of the pro forma financial information presented in this Proxy Statement, see the section of this Proxy Statement entitled “Unaudited U.S. GAAP Pro Forma Financial Information.”

We are not affiliated with Cadbury, and we have not had the cooperation of Cadbury’s management or due diligence access to Cadbury or its business or management for the purposes of preparing this Proxy Statement. Therefore, non-public information concerning Cadbury’s business and financial condition was not available to us for the purpose of presenting historical and pro forma per share data for the nine-month period ended September 30, 2009. We have requested current financial information from Cadbury, including financial information for the nine-month period ended September 30, 2009. Our legal advisors received a letter dated December 15, 2009 in which Cadbury rejected our request. However, if we do receive such information in a timely manner, we would compile historical and pro forma per share data for the nine-month period ended September 30, 2009 and include it in this Proxy Statement.

Cadbury’s consolidated financial statements are prepared in accordance with IFRS, which differs in a number of significant respects from U.S. GAAP. For a general discussion of the significant differences between IFRS and U.S. GAAP, please see the section of this Proxy Statement entitled “Summary of Significant Differences Between IFRS and U.S. GAAP.”

 

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You should read the information presented in the table below together with the historical financial statements of Kraft Foods and Cadbury and the related notes and the Unaudited U.S. GAAP Pro Forma Financial Information appearing elsewhere in this Proxy Statement or incorporated herein by reference. The pro forma data are unaudited and for illustrative purposes only. The companies may have performed differently had they always been combined. You should not rely on this information as being indicative of the historical results that would have been achieved had the companies always been combined or the future results that the combined company will achieve after the consummation of the Cadbury acquisition.

 

		For the six months ended June 30, 2009			Year ended December 31, 2008
Kraft Foods historical data
Earnings per share from continuing operations
Basic		$	1.01		$	1.22
Diluted			1.00			1.21
Cash dividends declared per share			0.58			1.12
Book value per share			16.47			—
Cadbury historical data
Earnings per share from continuing operations
Basic			5.8p			22.8p
Diluted			5.8p			22.8p
Cash dividends declared per share			5.7p			16.4p
Book value per share			227.0p			—
Unaudited pro forma combined
Earnings per share
Basic		$	0.81		$	1.23
Diluted			0.81			1.22
Cash dividends declared per share(1)			0.58			1.12
Book value per share			18.29			—
Equivalent basis unaudited pro forma combined
Earnings per share
Basic			14.2p			16.9p
Diluted			14.1p			16.8p
Cash dividends declared per share(1)			10.1p			15.5p
Book value per share			288.1p			—

 

(1)	Same as historical since no change in dividend policy is expected as a result of the Cadbury acquisition.

 

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COMPARATIVE MARKET PRICE AND DIVIDEND INFORMATION

Our common stock is traded on the NYSE under the symbol “KFT.” Cadbury ordinary shares are traded on the London Stock Exchange (“LSE”) under the symbol “CBRY,” and Cadbury ADSs are traded on the NYSE under the symbol “CBY.”

The following table sets forth, for the periods indicated, the per share high and low sales prices of our common stock and Cadbury ADSs on the NYSE and Cadbury ordinary shares on the LSE, as well as the dividends declared thereon. The share prices in the table have been obtained from FactSet. Cadbury ordinary share and Cadbury ADS dividend numbers have been obtained from publicly available information published by Cadbury.

 

		Kraft Foods common stock ($)						Cadbury ordinary shares (p)						Cadbury ADSs ($)
		High		Low		Dividend		High		Low		Dividend		High		Low		Dividend
2007, quarter ended
March 31		35.91		30.20		0.25		656.50		529.00		9.90		51.41		40.74		0.772
June 30		36.74		30.33		0.25		723.50		652.00		5.00		57.30		51.37		N/A
September 30		36.33		31.15		0.27		680.00		534.50		N/A		54.30		42.78		0.406
December 31		35.20		32.30		0.27		641.00		570.00		N/A		53.24		46.90		N/A
2008, quarter ended
March 31		32.70		28.81		0.27		625.00		539.50		10.50		49.56		43.43		N/A
June 30(1)		32.82		28.39		0.27		N/A		N/A		N/A		N/A		N/A		N/A
April 1–May 1		N/A		N/A		N/A		586.50		556.50		N/A		46.61		43.86		0.844
May 2–June 30		N/A		N/A		N/A		704.50		609.50		N/A		56.01		48.55		N/A
September 30		34.97		28.40		0.29		661.50		565.50		5.30		50.94		40.32		0.4195
December 31		33.54		24.87		0.29		605.50		453.25		N/A		40.09		29.65		N/A
2009
January 1–March 31		29.57		21.00		0.29		619.00		497.25		11.10		37.18		28.06		0.6394
April 1–June 30		27.04		22.05		0.29		554.50		486.50		N/A		35.99		28.78		N/A
July 1–September 30		28.81		25.70		0.29		805.00		520.00		5.70		52.53		33.91		0.376
October 1–December 1		27.64		25.95		N/A		814.00		758.00		N/A		54.00		49.72		N/A

 

(1)

On May 2, 2008, Cadbury plc was inserted as a new holding company above Cadbury Schweppes plc, trading on the LSE with a secondary listing on the NYSE via an American Depositary Receipt program and began trading as a stand-alone confectionery company. On May 7, 2008, Cadbury completed the demerger of its Americas Beverages business as Dr. Pepper Snapple Group. The market prices for Cadbury in the table above include the value of the Americas Beverages business through such date. On May 1, 2008, the last trading day prior to Cadbury trading as a stand-alone confectionery company, the closing price per Cadbury Schweppes ordinary share was 574.50p and the closing price per Cadbury Schweppes ADS was $45.46. On May 2, 2008, the first day that Cadbury traded as a stand-alone company, the closing price per Cadbury ordinary share was 640.00p and the closing price per Cadbury ADS was $51.60.

The following table shows, as of September 4, 2009, the last full trading day before we publicly announced a possible offer for a combination with Cadbury, November 6, 2009, the last full trading day before we publicly announced a firm intention to make an offer to acquire Cadbury, and December 1, 2009, the last practicable day before we made the offer, the closing price per share of our common stock and Cadbury ADS on the NYSE and the closing price per Cadbury ordinary share on the LSE. This table also presents the implied equivalent value per security. The implied equivalent value of a Cadbury ordinary share was calculated by multiplying the closing market price per share of our common stock on the NYSE by 0.2589, the exchange ratio for each Cadbury ordinary share tendered in the offer, and then adding to that amount the cash portion of the exchange consideration of 300 pence payable for each Cadbury ordinary share tendered in the offer. The implied equivalent

 

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value of a Cadbury ADS was calculated by multiplying the closing market prices per share of our common stock by 1.0356, the implied exchange ratio for each Cadbury ADS tendered in the offer, and then adding to that amount an amount in U.S. dollars equal to the cash portion of the exchange consideration of 1,200 pence payable for each Cadbury ADS tendered in the offer. Unless Cadbury shareholders elect to receive all cash or all shares of Kraft Foods common stock under the mix and match facility (as described in the section of this Proxy Statement entitled “The Offer—Terms of the Offer”), they will receive the offer consideration in a mixture of cash and shares of Kraft Foods common stock on the terms set forth in the December 4 offer documents and described in this Proxy Statement.

In calculating the implied equivalent values below, amounts in U.S. dollars have been translated into pounds sterling, in the case of Cadbury ordinary shares, and amounts in pounds sterling have been translated into U.S. dollars, in the case of Cadbury ADSs, in each case as follows:

 

•

at a rate of £1.00 = $1.6346, as quoted by WM/Reuters on September 4, 2009;

 

•

at a rate of £1.00 = $1.6609, as quoted by WM/Reuters on November 6, 2009; and

 

•

at a rate of £1.00 = $1.6627, as quoted by WM/Reuters on December 1, 2009.

 

		Kraft Foods common stock ($)		Cadbury Security				Implied Equivalent Value per Cadbury Security
				ordinary shares (p)		ADSs ($)(1)		ordinary shares (p)(2)		ADSs ($)(2)
September 4, 2009		28.10		568.00		37.46		745.07		48.72
November 6, 2009		26.78		758.00		50.50		717.44		47.66
December 1, 2009		26.50		806.00		53.24		712.63		47.40

 

(1)	Each Cadbury ADS represents four Cadbury ordinary shares.

 

(2)	Unless Cadbury shareholders elect to receive all cash or all shares under the mix and match facility, they will receive the offer consideration in a mixture of cash and shares of Kraft Foods common stock on the terms set forth in the December 4 offer documents and described in this Proxy Statement.

The market prices of our common stock, Cadbury ordinary shares and Cadbury ADSs are likely to fluctuate prior to the expiration date of the offer and cannot be predicted. We urge you to obtain current market information regarding our common stock, Cadbury ordinary shares and Cadbury ADSs.

 

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RISK FACTORS

Before deciding how to vote your shares at the Special Meeting, you should consider carefully the following risk factors, and the other risks and information contained in this Proxy Statement and in the documents incorporated herein by reference. Please see “Where You Can Find More Information” on page 75 of this Proxy Statement for information on where you can find additional risk factors and other information incorporated by reference in this Proxy Statement.

Risk Factors Relating to the Proposed Cadbury Acquisition and the Offer

Our existing shareholders will be diluted as a consequence of the issuance of our common stock pursuant to the proposed Cadbury acquisition and they will have reduced ownership and voting interests in Kraft Foods following completion of the Cadbury acquisition.

Existing Kraft Foods shareholders will own a smaller percentage of our common stock than they currently own. We estimate that, if we issued all 370 million of the shares we are seeking approval to issue, existing Kraft Foods shareholders will own approximately 80% of the shares of our common stock outstanding immediately after the Cadbury acquisition, including any related equity financing, is completed.

Risks of executing the proposed Cadbury acquisition could cause the market price of our common stock to decline.

The market price of our common stock may decline as a result of the Cadbury acquisition, among other reasons, if:

 

•

the integration of Cadbury’s business is delayed or unsuccessful;

 

•

we do not achieve the expected benefits of our acquisition of Cadbury as rapidly or to the extent anticipated by us, financial analysts or investors or at all;

 

•

the effect of the Cadbury acquisition on our financial results is not consistent with the expectations of financial analysts or investors;

 

•

former Cadbury shareholders sell a significant number of shares of our common stock after completion of the Cadbury acquisition; or

 

•

we fail to acquire 100% of the Cadbury ordinary shares, including those represented by Cadbury ADSs, in the Cadbury acquisition or through the compulsory acquisition process.

The number of shares of our common stock that will be issued to Cadbury shareholders pursuant to the Cadbury acquisition will be not more than 370 million, representing approximately 20% of the issued and outstanding shares of our common stock, as increased as a result of the Cadbury acquisition, calculated at December 15, 2009. If a significant proportion of Cadbury shareholders who receive our common stock in the offer seek to sell those shares within a short period after completion of the offer, this could create selling pressure in the market for our common stock or a perception that such selling pressure may develop, either of which may adversely affect the market for, and the market price of, our common stock.

Failure to acquire 100% of the Cadbury ordinary shares, including Cadbury ADSs, may affect our ability to complete any post-closing restructuring of Cadbury and its subsidiaries. This could reduce or delay the cost savings or revenue benefits to the combined company.

To effect a compulsory acquisition of the remaining Cadbury ordinary shares, including those represented by Cadbury ADSs, we will need to first obtain at least 90% of the Cadbury ordinary shares to which the offer

 

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relates, including those represented by Cadbury ADSs. Unlike domestic U.S. corporations, English corporations cannot merge with another corporation with the approval of a majority shareholder vote. The offer is conditional upon valid acceptances being received (and not, where permitted, withdrawn) in respect of not less than 90% of Cadbury ordinary shares, including those represented by Cadbury ADSs, but this percentage may be reduced by us to any percentage above 50%. Were this condition to be reduced, we could complete the offer without being able to acquire compulsorily the remaining Cadbury ordinary shares, including those represented by Cadbury ADSs, we do not own. We would then be entitled to exercise control of Cadbury and affect the composition of the Cadbury Board. However, depending on the level of acceptances received, we may not control sufficient voting rights to delist Cadbury from the Official List maintained by the United Kingdom Financial Services Authority and from trading on the LSE; it may take longer and be more difficult to effect any post-closing restructuring; and the full amount of the cost synergies and revenue benefits identified for the combined company may not be obtained or may only be obtained over a longer period of time. In addition, if we own less than 100% of Cadbury after completion of the offer, we may not be able to carry out joint cash pooling or other intra-company transactions with Cadbury and its subsidiaries on favorable terms or at all. This may adversely affect our ability to achieve the expected amount of cost synergies and revenue benefits after the offer is completed.

We must obtain governmental and regulatory consents to complete the offer, which, if delayed, not granted or granted with onerous conditions, may jeopardize or delay the offer, result in additional expenditures of money and resources and/or reduce the anticipated benefits of the acquisition.

The offer is conditional on, among other things, the receipt of regulatory approvals from regulators with jurisdiction over the operations of Kraft Foods and Cadbury. On December 14, 2009, the required waiting period under the HSR Act expired. The governmental agencies from which we seek these approvals have discretion in administering the governing regulations. As a condition to their approval of the Cadbury acquisition, agencies may impose requirements, limitations or costs or require divestitures or place restrictions on the conduct of the combined company’s business. These requirements, limitations, costs, divestitures or restrictions could jeopardize or delay the consummation of the offer or may reduce the anticipated benefits of the Cadbury acquisition to the combined company. Furthermore, we may not be able to obtain the required consents and approvals and, if so, the required conditions of the offer may not be satisfied. Even if all of the required consents and approvals are obtained and the conditions to the consummation of the offer are satisfied, we will not necessarily be able to control the terms, conditions and timing of the approvals. If we agree to any material requirements, limitations, costs, divestitures or restrictions in order to obtain any approvals required to consummate the offer, these requirements, limitations, additional costs or restrictions could adversely affect the two companies’ ability to integrate their operations or reduce the anticipated benefits of the proposed Cadbury acquisition. This could result in a delay in completion of, or a decision not to complete, the Cadbury acquisition, or have a material adverse effect on the business and results of operations of the combined company. Please see the section of this Proxy Statement entitled “The Offer—Conditions of the Offer” for a discussion of certain conditions of the offer and the section of this Proxy Statement entitled “The Offer—Regulatory Approvals” for a description of the material regulatory approvals necessary in connection with the offer.

Even if a material adverse change to Cadbury’s business or prospects were to occur, in certain circumstances, we may not be able to invoke the offer conditions and terminate the offer, which could reduce the value of our common stock.

Completion of the offer is subject to a number of conditions, including that there is no material adverse change affecting Cadbury before the offer becomes, or is declared, wholly unconditional. Under the U.K. City Code on Takeovers and Mergers (the “U.K. Takeover Code”), and except for the minimum acceptance condition and the conditions relating to the European Commission antitrust approval (as described in the section of this Proxy Statement entitled “The Offer—Regulatory Approvals”), we may invoke a condition to the offer to cause the offer not to proceed only if the U.K. Panel on Takeovers and Mergers (the “U.K. Takeover Panel”) is satisfied that the circumstances giving rise to that condition not being satisfied are of material significance to Kraft Foods in the context of the offer. Because of this consent requirement, the conditions may provide us less protection than the customary conditions in an offer for a U.S. domestic company.

 

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If a material adverse change affecting Cadbury were to occur and the U.K. Takeover Panel does not allow us to invoke a condition to cause the offer not to proceed, the market price of our common stock may decline or our business or our financial condition may be materially adversely affected.

We have not had the cooperation of Cadbury’s management or due diligence access to Cadbury or its business or management for the purposes of preparing this Proxy Statement.

We have not had the cooperation of Cadbury’s management or due diligence access to Cadbury or its business or management for the purposes of preparing this Proxy Statement. Accordingly, we have prepared the information in, or incorporated by reference into, this Proxy Statement based only on publicly available information regarding Cadbury and such information has not been subject to comment or verification by Cadbury, us or their or our directors.

We have no knowledge that any information or statements relating to Cadbury contained in, or incorporated by reference into, this Proxy Statement are inaccurate or incomplete. However, we were not involved in the preparation of such information and statements and, therefore, cannot verify the accuracy, completeness or truth of such information or any failure by Cadbury to disclose events that may have occurred, but that are unknown to us, that may affect the significance or accuracy of any such information.

In addition, we have made certain assumptions relating to the forecast level of cost savings, synergies and associated costs of the Cadbury acquisition based only on publicly available information regarding Cadbury. Our assumptions relating to the forecast level of cost savings, synergies and associated costs of the Cadbury acquisition may be inaccurate.

Further, the completion of the Cadbury acquisition may give rise to the right of contractual counterparties to terminate material supply and other contracts with Cadbury or result in other consequences as a result of matters unknown to us. As such, there may be other matters relating to Cadbury that are unknown by us and that may have an adverse effect on the combined company’s financial condition and results of operations and/or result in substantial additional costs or liabilities.

Whether or not the Cadbury acquisition is completed, the announcement and prospect of the successful completion of the Cadbury acquisition could cause disruptions in the businesses of Kraft Foods and/or Cadbury, which could have material adverse effects on their businesses and financial results, as well as on the business prospects and financial results of the combined company.

Whether or not the Cadbury acquisition is completed, the announcement and prospect of the successful completion of the Cadbury acquisition could cause disruptions in the businesses of Kraft Foods and/or Cadbury. Specifically, if the Cadbury acquisition succeeds, some current and prospective employees may experience uncertainty about their future roles within the combined company, which may adversely affect Kraft Foods’ and Cadbury’s abilities to retain or recruit key managers and other employees. If Kraft Foods and Cadbury fail to manage these risks effectively, the business and financial results of Kraft Foods, Cadbury and the combined company could be adversely affected.

If there are significant, unforeseen difficulties integrating the business operations of Kraft Foods and Cadbury, they could adversely affect the business of the combined company.

We intend, to the extent possible, to integrate our operations with those of Cadbury. Our goal in integrating these operations is to increase revenues through enhanced growth opportunities and achieve cost savings by taking advantage of the significant anticipated synergies of consolidation. However, we may encounter difficulties integrating our operations with Cadbury’s operations, resulting in a delay or the failure to achieve the anticipated synergies, including the expected increases in earnings and cost savings. If such difficulties are significant, this could adversely affect the business of the combined company.

 

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We may incur higher than expected integration, transaction and acquisition-related costs.

We expect to incur a number of non-recurring costs associated with combining the operations of the two companies, including implementation cash costs estimated to be approximately $1.2 billion in the first three years following completion of the Cadbury acquisition. In addition, we will incur legal, accounting and transaction fees and other costs related to the offer. Some of these costs are payable regardless of whether the offer is completed and such costs may be higher than anticipated.

Although we believe that the elimination of duplicative costs, as well as the realization of other efficiencies related to the integration of the businesses, will offset these implementation and acquisition costs over time, this net benefit may not be achieved within the expected timetable. In addition, some of these costs could be higher than we anticipate, which could reduce the net benefits of the transaction and impact our results of operations.

The terms of the offer are subject to change.

We have reserved the right to, in our sole discretion, increase the value of our offer to Cadbury shareholders, which could result in us paying additional cash consideration or issuing additional shares of our common stock. If any term of the Cadbury acquisition described in this Proxy Statement changes in a manner that we believe is material to our shareholders, we will supplement this Proxy Statement to inform you of such change and, if legally required, resolicit proxies from our shareholders.

Shareholders in the combined company will be more exposed to currency exchange rate fluctuations as, following completion of the Cadbury acquisition, there will be an increased proportion of assets, liabilities and earnings denominated in foreign currencies.

As a result of the successful completion of the Cadbury acquisition, the financial results of the combined company will be more exposed to currency exchange rate fluctuations and an increased proportion of assets, liabilities and earnings will be denominated in non-U.S. dollar currencies.

The combined company will present its financial statements in U.S. dollars and will have a significant proportion of net assets and income in non-U.S. dollar currencies, primarily pounds sterling and the euro, as well as a range of emerging market currencies. The combined company’s financial results and capital ratios will therefore be sensitive to movements in foreign exchange rates. A depreciation of non-U.S. dollar currencies relative to the U.S. dollar could have an adverse impact on the combined company’s financial results.

Risk Factors Relating to Our Business and the Business of the Combined Company

We operate in a highly competitive industry, which may affect our profitability.

The food industry is highly competitive. We compete based on price, product innovation, product quality, brand recognition and loyalty, effectiveness of marketing, promotional activity and the ability to identify and satisfy consumer preferences.

From time to time, we may need to reduce our prices in response to competitive and customer pressures and to maintain our market share. Competition and customer pressures may also restrict our ability to increase prices in response to commodity and other input cost increases. Our results of operations will suffer if profit margins decrease, as a result of a reduction in prices, increased input costs or other factors, and if we are unable to increase sales volumes to offset those profit margin decreases.

Retailers are increasingly offering retailer brands that compete with some of our products. It is important that our products provide higher value and/or quality to our consumers than less expensive alternatives. If the difference in value or quality between our products and those of retailer brands narrows, or if such difference in

 

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quality is perceived to have narrowed, then consumers may not buy our products. Furthermore, during periods of economic uncertainty, such as have been experienced in the recent past and may be experienced in the future, consumers tend to purchase more retailer brands or other economy brands, which could reduce sales volumes of our products or shift our product mix to our lower margin offerings. If we are not able to maintain or improve our brand image or value proposition, it could have a material effect on our market share and our profitability.

We may also need to increase spending on marketing, advertising and new product innovation to protect existing market share or increase market share. The success of our investments is subject to risks, including uncertainties about trade and consumer acceptance. As a result, our increased expenditures may not maintain or enhance market share and could result in lower profitability.

The consolidation of retail customers, the loss of a significant customer or a material reduction in sales to a significant customer could affect our operating margins, our profitability, our sales and our results of operations.

Retail customers, such as supermarkets, warehouse clubs and food distributors in the United States, the European Union and our other major markets, continue to consolidate. These consolidations have produced large, sophisticated customers with increased buying power. These larger retailers, capable of operating with reduced inventories, can resist price increases and demand lower pricing, increased promotional programs and specifically tailored products. They also may use shelf space currently used for our products for their own retailer brands. The consolidation of retail customers also increases the risk that a severe adverse impact on their business operations could have a corresponding material adverse effect on us. Also, our retail customers may be affected by recent economic conditions. For example, they may not have access to funds or financing and that could cause them to delay, decrease or cancel purchases of our products, or to not pay us or to delay paying us for previous purchases.

During 2008, our five largest customers accounted for approximately 27% of our net revenues, with our largest customer, Wal-Mart Stores, Inc., accounting for approximately 16% of our net revenues. There can be no assurance that all significant customers will continue to purchase our products in the same quantities that they have in the past. The loss of any one of our significant customers or a material reduction in sales to a significant customer could have a material adverse effect on our sales and results of operations.

Increased price volatility for commodities we purchase may affect our profitability.

We are a major purchaser of commodities, including dairy, coffee, cocoa, wheat, corn products, soybean and vegetable oils, nuts, meat products, and sugar and other sweeteners. We also use significant quantities of plastic, glass and cardboard to package our products, and natural gas for our factories and warehouses. Price volatility for commodities we purchase has increased due to conditions outside of our control, including recent economic conditions, currency fluctuations, availability of supply, weather, consumer demand and changes in governmental agricultural programs. Although we monitor our exposure to commodity prices as an integral part of our overall risk management program, continued volatility in the prices of commodities we purchase could increase the costs of our products and services, and our profitability could suffer.

Our product sales depend on our ability to predict, identify and interpret changes in consumer preferences and demand, and on our ability to develop and offer new products rapidly enough to meet those changes.

Consumer preferences for food products change continually. Our success depends on our ability to predict, identify and interpret the tastes and dietary habits of consumers and to offer products that appeal to those preferences.

If we do not succeed in offering products that appeal to consumers, our sales and market share will decrease, and our profitability could suffer. We must be able to distinguish among short-term fads, mid-term

 

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trends and long-term changes in consumer preferences. If we are unable accurately to predict which shifts in consumer preferences will be long-term, or if we fail to introduce new and improved products to satisfy those preferences, our sales could decline. In addition, because of our varied consumer base, we must offer a sufficient array of products to satisfy the broad spectrum of consumer preferences. If we fail to expand our product offerings successfully across product categories or if we do not rapidly develop products in faster growing and more profitable categories, demand for our products will decrease and our profitability could suffer.

Prolonged negative perceptions concerning the health implications of certain food products could influence consumer preferences and acceptance of some of our products and marketing programs. For example, recently, consumers have been increasingly focused on health and wellness, including weight management and sodium consumption. Although we strive to respond to consumer preferences and social expectations, we may not be successful in these efforts. Continued negative perceptions and failure to satisfy consumer preferences could decrease demand for our products and adversely affect our profitability.

Legal claims or other regulatory enforcement actions could affect our sales, reputation and profitability.

As a large food company that operates in a highly regulated, highly competitive environment with growing retailer power and a constantly evolving legal and regulatory framework around the world, we are subject to heightened risk of legal claims or other regulatory enforcement actions. Legal claims or regulatory enforcement actions arising out of our failure or alleged failure to comply with applicable laws and regulations could adversely affect our sales, reputation and profitability.

Further, selling products for human consumption involves inherent risks. We could be required to recall products due to product contamination, spoilage or other adulteration, product misbranding or product tampering. We may also suffer losses if our products or operations violate applicable laws or regulations, or if our products cause injury, illness or death. In addition, our marketing could be the target of claims of false or deceptive advertising or other criticism. A significant product liability or other legal judgment or a related regulatory enforcement action against us, or a widespread product recall, may adversely affect our profitability. Moreover, even if a product liability or consumer fraud claim is unsuccessful, has no merit or is not pursued, the negative publicity surrounding assertions against our products or processes could adversely affect our sales, reputation and profitability.

Increased regulation could increase our costs and affect our profitability.

Food production and marketing are highly regulated by a variety of federal, state, local and foreign agencies. New regulations and changes to existing regulations are issued regularly. Increased governmental regulation of the food industry, such as proposed requirements designed to enhance food safety or to regulate imported ingredients, could increase our costs and adversely affect our profitability.

As a multinational corporation, our operations are subject to additional risks.

We generated approximately half of our 2008 sales, 43% of our 2007 sales and 40% of our 2006 sales outside the United States. If the Cadbury acquisition is successful, the percentage of the combined company’s sales generated outside of the United States will increase. With operations in over 70 countries, our operations are subject to risks inherent in multinational operations, including:

 

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fluctuations in currency values,

 

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unpredictability of foreign currency exchange controls,

 

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discriminatory fiscal policies,

 

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compliance with a variety of local regulations and laws,

 

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•

changes in tax laws and the interpretation of such laws,

 

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difficulties enforcing intellectual property and contractual rights in certain jurisdictions, and

 

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greater risk of uncollectible accounts and longer collection cycles.

In addition, certain jurisdictions could impose tariffs, quotas, trade barriers and other similar restrictions on our sales. Moreover, our business operations could be interrupted and negatively affected by economic changes, geopolitical regional conflicts, terrorist activity, political unrest, civil strife, acts of war, and other economic or political uncertainties. All of these risks could result in increased costs or decreased revenues, either of which could adversely affect our profitability.

If we are unable to expand our operations in certain emerging markets, our growth rate could be negatively affected.

In 2007, we unveiled our strategies to grow our operations with increased focus on emerging markets, especially Brazil, Russia, China and other regions of Southeast Asia. The success of our operations depends in part on our ability to grow our business in these and other emerging markets. In some cases, emerging markets have greater political and economic volatility and greater vulnerability to infrastructure and labor disruptions. In addition, emerging markets are becoming more competitive as other companies grow globally and local, low cost manufacturers expand their production capacities. If we are unable to increase our business in emerging markets, our market share and profitability could be adversely affected.

We may not be able to consummate proposed acquisitions or divestitures successfully or integrate acquired businesses successfully.

From time to time, we may evaluate additional acquisition candidates in the future that would strategically fit our business objectives. If we are unable to complete acquisitions, or integrate successfully and develop these businesses to realize revenue growth and cost savings, our financial results could be adversely affected. In addition, from time to time, we divest businesses that do not meet our strategic objectives, or do not meet our growth or profitability targets. Our profitability may be affected by either gains or losses on the sales of, or lost operating income from, those businesses. Also, we may not be able to complete desired or proposed divestitures on terms favorable to us. Moreover, we may incur asset impairment charges related to acquisitions or divestitures, which may reduce our profitability. Finally, our acquisition or divestiture activities may present financial, managerial and operational risks, including diversion of management attention from existing core businesses, difficulties integrating or separating personnel and financial and other systems, adverse effects on existing business relationships with suppliers and customers, inaccurate estimates of fair value made in the accounting for acquisitions and amortization of acquired intangible assets which would reduce future reported earnings, potential loss of customers or key employees of acquired businesses, and indemnities and potential disputes with the buyers or sellers. Any of these activities could affect our product sales, financial condition and results of operations.

For information on the risks that relate to the Cadbury acquisition, please see the section of this Proxy Statement entitled “—Risk Factors Relating to the Proposed Cadbury Acquisition and the Offer.”

Business process improvement initiatives to harmonize our systems and processes may fail to operate as designed and intended.

We regularly implement business process improvement initiatives to harmonize our systems and processes and to optimize our performance. Our current business process initiatives include, but are not limited to, our reorganization of our European operations, the delivery of a SAP enterprise resource planning application, and the outsourcing of certain administrative functions. If our business process improvement initiatives fail, our ability to improve existing operations, achieve anticipated cost savings and support future growth could be delayed.

 

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Changes in our credit ratings and the effects of volatile economic conditions on the credit market could adversely affect our borrowing costs and liquidity.

Our credit ratings depend generally on the amount of our debt and our ability to service our debt. A downgrade in our credit ratings, including as a result of incurring additional debt, would, and disruptions in the commercial paper market or the effects of other volatile economic conditions on the credit market could, reduce the amount of commercial paper that we could issue, and could raise our borrowing costs for both short-term and long-term debt offerings.

Volatility in the equity markets or interest rates could substantially increase our pension costs and have a negative impact on our operating results and profitability.

At the end of 2008, the projected benefit obligation of our defined benefit pension plans was $9.3 billion and assets were $7.0 billion. The difference between plan obligations and assets, or the funded status of the plans, significantly affects the net periodic benefit costs of our pension plans and the ongoing funding requirements of those plans. Among other factors, changes in interest rates, mortality rates, early retirement rates, investment returns and the market value of plan assets can (a) affect the level of plan funding, (b) cause volatility in the net periodic pension cost and (c) increase our future funding requirements. In addition, if we divest certain businesses, we may be required to increase future contributions to the benefit plans and the related net periodic pension cost could increase.

We expect to make approximately $410 million in contributions to our pension plans in 2009, which is approximately $190 million more than we made in 2008. We also expect that our net pension cost will increase by approximately $175 million to approximately $415 million in 2009. Volatile economic conditions increase the risk that we may be required to make additional cash contributions to the pension plans and recognize further increases in our net pension cost beyond 2009.

Cadbury operates occupational defined benefit pension schemes and the combined company may be required to fund an increase in the cost of future benefits and/or meet funding shortfalls in respect of these schemes.

According to its publicly available information, Cadbury has various pension schemes throughout the world and these cover a significant proportion of its current employees. The principal schemes are of the funded defined benefit type, with benefits accruing based on salary and length of service. The net retirement benefit obligation, recognized in the balance sheet at June 30, 2009 was £482 million versus £258 million at December 31, 2008. The actuarial loss on post retirement benefit obligations for the six months ended June 30, 2009 was £254 million (£190 million net of tax) and £388 million (£291 million net of tax) for the 12 months ended December 31, 2008. Regular assessments are carried out by independent actuaries and the long-term contribution rates decided on the basis of their guidance after discussions with trustees and the plan sponsor. According to Cadbury’s Annual Report on Form 20-F for the year ended December 31, 2008, which has been filed by Cadbury with the SEC and which is also incorporated by reference into this Proxy Statement, Cadbury expects to contribute approximately £56 million to its defined benefit schemes in 2009, with additional scheduled recovery contributions of approximately £4 million in 2009 to further fund its defined benefit obligation in the United Kingdom. For more information on the funding status of these plans, please refer to Cadbury’s unaudited financial statements for the six months ended June 30, 2009 included in Cadbury’s Report on Form 6-K filed with the SEC on July 29, 2009 and note 25 in Cadbury’s audited consolidated financial statements for the year ended December 31, 2008 included in Cadbury’s Annual Report on Form 20-F for the year ended December 31, 2008, both of which are incorporated by reference into this Proxy Statement.

Because we have not had the cooperation of Cadbury’s management or due diligence access to Cadbury or its business or management for the purposes of preparing this Proxy Statement, we do not have enough information to assess the extent to which Cadbury’s defined benefit pension schemes are adequately funded in

 

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relation to benefits accrued to date, or whether costs for benefits accruing in the future are likely to increase materially from previous experience. Increases in the value of the liabilities of the defined benefit pension schemes and/or a reduction in the value of the assets supporting funded schemes can lead to a need to record increased deficits in the balance sheet. An increase in the value of the net liabilities of such schemes may negatively affect the combined company’s balance sheet and distributable reserves, which could have a material adverse effect on the combined company’s business, operating or financial results or financial position. Further demands for materially increased contributions from Cadbury employers to meet past service deficits or future service costs would impact the cash flows of the combined company.

There may also be pension arrangements or “pension-like” programs in relation to Cadbury’s non-U.K. employees that are not reflected in Cadbury’s financial statements, such as mandatory termination indemnities in favor of Cadbury employees or U.S. industry based multi-employer pension programs in which Cadbury employees participate. Because we do not have access to Cadbury’s non-public business or financial information, we do not have the information to assess whether any such programs or arrangements exist, and, if so, whether the combined company could have significant obligations under these programs or arrangements.

In relation to Cadbury’s U.K. pension arrangements, the Cadbury Pension Fund is a funded defined benefit pension scheme, which according to Cadbury’s Annual Report on Form 20-F for the year ended December 31, 2008, which has been filed by Cadbury with the SEC and which is also incorporated by reference into this Proxy Statement, represents about 65% of Cadbury and its subsidiaries’ post retirement liabilities. Its assets are held by trustees separate from the assets of Cadbury. U.K. pension law requires employers to pay periodic contributions and lump sums to these types of pension schemes.

While the Cadbury Pension Fund is ongoing (as opposed to if the Cadbury Pension Fund is wound up, which is described below) contributions are paid by employers over time to meet the cost of future service benefits and any past service deficits. Because we do not have access to the trust deed and rules of the Cadbury Pension Fund, we do not know whether the contributions to be paid are set by agreement between the employer and trustees or by the trustees alone. U.K. law requires a degree of prudence in the calculation process used to set the level of contributions and depending on the situation, at the next valuation date, there could be a material increase in the cash demands placed on Cadbury and its subsidiaries who are employers for the purposes of the Cadbury Pension Fund, which may have a material adverse effect on the combined company’s business, operating or financial results or financial position.

If the Cadbury Pension Fund trustees have the power to wind up the Cadbury Pension Fund and elect to exercise this power, Cadbury and its subsidiaries who are employers for the purposes of the Cadbury Pension Fund would be required to pay an amount equal to the shortfall or deficit at that time between the Cadbury Pension Fund’s assets and its liabilities assessed on the so called “buy out basis.” This is the cost of purchasing annuities to cover all the Cadbury Pension Fund benefits with a buy out provider. We estimate that such an amount may be significant and could be in excess of £1.0 billion. Buy out deficits are volatile and depend on, among other things, market conditions and the appetite of buy-out providers from time to time. In the event the Cadbury Pension Fund trustees were to wind up the fund, the amount of the deficit may be greater or less than this amount and the requirement to meet this deficit in very short order may have a material adverse effect on the combined company’s business, operating or financial results or financial position.

Cadbury’s pension liabilities are calculated using the accounting valuation basis for the purposes of determining the provision to be included in the balance sheet in its financial statements. According to Cadbury’s Annual Report on Form 20-F for the year ended December 31, 2008, the Cadbury Pension Fund was broadly in balance on an accounting basis at December 31, 2008. The level of the deficit calculated using the accounting valuation basis is volatile and depends on, among other things, market conditions from time to time. We estimate that, as at August 31, 2009, the accounting deficit would have been approximately £400 million. Following completion of the offer, depending on the circumstances at the time the next balance sheet is prepared for the

 

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combined company, Cadbury’s pension liabilities may have a material adverse effect on the combined company’s business, operating or financial results or financial position.

Upon completion of the offer, the U.K. Pensions Regulator will have power in certain circumstances to require us and our subsidiaries (including those subsidiaries outside the U.K.) to make substantial payments into or otherwise provide financial support to the Cadbury Pension Fund, for amounts up to the buy-out deficit from time to time. Thus, upon completion of the offer, liability to support the Cadbury Pension Fund will not necessarily be limited to Cadbury and its subsidiaries.

Cadbury’s “Vision into Action” initiative to deliver improvements in business performance may fail and the implementation of the plan may disrupt the combined company’s business.

On June 19, 2007, Cadbury announced a new strategy for its confectionery business called “Vision into Action,” which includes a plan to improve its margin performance to achieve a mid-teens operating margin by 2011. According to publicly available information published by Cadbury, this plan includes reductions in the number of factories and employees, material changes to Cadbury’s supply chain configuration and to the structure and operation of Cadbury’s business.

To the extent that we continue to implement the “Vision into Action” plan following completion of the offer, these reductions and changes increase the risk of disruption to the combined company’s business, which may occur, for example, through a failure to successfully implement the Vision into Action plan, unforeseen events or workforce actions.

Cadbury has publicly indicated that it expects to incur a restructuring charge of £550 million (of which around £50 million is non-cash) and invest £200 million of capital expenditure behind the “Vision into Action” plan. If we continue to implement this plan following completion of the offer, there can be no guarantee that this plan, or any of Cadbury’s other plans or investments, will deliver the anticipated improvements in business performance, which could adversely affect the business of the combined company. In addition, the implementation of the plan may not give rise to a sustained improvement in Cadbury’s revenues or profitability or reach the level of projected improvement.

Risk Factors Relating to Cadbury’s Business

Additionally, we encourage you to read and consider other risk factors specific to Cadbury’s businesses (that may also affect the combined company after consummation of the Cadbury acquisition) described in the section entitled “Risk Factors” in Cadbury’s Annual Report on Form 20-F for the year ended December 31, 2008, which Cadbury has filed with the SEC and which we have also incorporated by reference into this Proxy Statement. Please see “Incorporation by Reference” on page 76 of this Proxy Statement.

 

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THE SPECIAL MEETING

Time, Date, Place and Purpose

We will hold a Special Meeting of Shareholders on Monday, February 1, 2010, at 9:00 a.m. CST at the Hilton Chicago/Northbrook Hotel in Northbrook, Illinois. Registration at the Hilton Chicago/Northbrook Hotel will open at 8:00 a.m. CST. Directions to the Hilton Chicago/Northbrook Hotel are included at the end of this Proxy Statement.

Shareholders are being asked to consider a proposal to approve Kraft Foods issuing up to 370 million shares of our common stock in connection with the Cadbury acquisition, including any issuance of shares of our common stock to finance the Cadbury acquisition.

Shareholders are also being asked to consider and vote on a proposal to approve any adjournment of the Special Meeting, including, if necessary, to solicit additional proxies in favor of the share issuance proposal if there are not sufficient votes for the proposal.

Other than Items 1 and 2 described in this Proxy Statement, we do not expect any other matters to be presented for a vote at the Special Meeting. If any other matter is properly brought before the Special Meeting, your proxy gives authority to the proxies described therein to vote on such matters in their discretion.

Record Date and Shares Entitled to Vote

Only shareholders owning our common stock at the close of business on the Record Date are entitled to (a) receive notice of the Special Meeting, (b) attend the Special Meeting and (c) vote on all matters that properly come before the Special Meeting.

At the close of business on the Record Date, 1,477,239,577 shares of our common stock were outstanding and entitled to vote. Each share is entitled to one vote on each matter to be voted upon at the Special Meeting.

Voting Procedures

If your shares are owned directly in your name with our transfer agent, Wells Fargo Bank, N.A., you are considered a registered shareholder with respect to those shares. If your shares are held in a brokerage account or by a bank or other nominee, you hold the shares in street name.

If you are a registered shareholder, you may vote:

 

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Via the Internet at www.eproxy.com/kft. The Internet voting system will be available 24 hours a day until 11:59 p.m. CST on Sunday, January 31, 2010;

 

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By telephone, if you are located within the U.S. or Canada. Call 1-800-560-1965 (toll-free) from a touch-tone telephone. The telephone voting system will be available 24 hours a day until 11:59 p.m. CST on Sunday, January 31, 2010;

 

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By returning a properly executed proxy card. Your proxy card must be received before the polls close at the Special Meeting on Monday, February 1, 2010; or

 

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In person at the Special Meeting. Please pre-register to attend the Special Meeting by following the pre-registration directions described in Question 26 of the section of this Proxy Statement entitled “Questions and Answers About the Special Meeting and Voting.”

If you hold your shares in street name, you may vote:

 

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Via the Internet at www.proxyvote.com (a 12-digit control number is required), by telephone or by returning a properly executed voting instruction form by mail, depending upon the method(s) your broker, bank or other nominee makes available; or

 

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•

In person at the Special Meeting. To do so, you must request a legal proxy from your broker or bank and present it at the Special Meeting. Please pre-register to attend the Special Meeting by following the pre-registration directions described in Question 26 of the section of this Proxy Statement entitled “Questions and Answers About the Special Meeting and Voting.”

The persons named as proxies on the proxy card must vote your shares as you have instructed. If you do not give a specific instruction on any proposal scheduled for vote at the Special Meeting but you have authorized the proxies generally to vote, they will vote for each proposal in accordance with the Board’s recommendation on each matter. Your authorization would exist, for example, if you merely sign, date and return your proxy card.

You may vote your shares via the Internet or by calling a toll-free number. If you received a paper copy of the proxy card or voting instruction form by mail, you may sign, date and mail your properly executed proxy card or voting instruction form. Or you may vote in person at the Special Meeting. We include instructions about each option in this Proxy Statement and on the enclosed proxy card or voting instruction form. Your vote is important to us. Whether or not you plan to attend the Special Meeting, we encourage you to vote promptly.

Quorum

A quorum of shareholders is necessary to validly hold the Special Meeting. A quorum will be present if a majority of the outstanding shares of our common stock on the Record Date are represented at the Special Meeting, either in person or by proxy. Your shares will be counted for purposes of determining a quorum if you vote via the Internet, by telephone or by submitting a properly executed proxy card or voting instruction form by mail, or if you vote in person at the Special Meeting. Abstentions will be counted for determining whether a quorum is present for the Special Meeting. A quorum is only needed to approve the share issuance proposal and not to approve the adjournment proposal.

Vote Required

Under NYSE rules, the approval of the share issuance proposal requires an affirmative vote of the majority of the votes cast on the proposal, provided that the total votes cast on the proposal represent over 50% of the total outstanding shares of our common stock (the “Outstanding Votes”). Votes FOR and AGAINST and abstentions count as votes cast (the “NYSE Votes Cast”). The NYSE Votes Cast must be greater than 50% of the total Outstanding Votes. Further, the number of votes FOR the proposal must be greater than 50% of the NYSE Votes Cast. Therefore, abstentions have the same effect as a vote AGAINST the proposal.

NYSE rules do not permit brokers discretionary authority to vote on the approval of the share issuance proposal or the adjournment proposal. Therefore, if you hold shares of our common stock in street name (see Question 13 of the section of this Proxy Statement entitled “Questions and Answers About the Special Meeting and Voting”) and do not provide voting instructions to your broker, your shares will not be voted on the proposals.

Approval of the adjournment proposal requires that the number of votes cast FOR exceed the number of votes cast AGAINST, whether or not a quorum is present. Abstentions are not considered as voting FOR or AGAINST the adjournment proposal and will have no effect on the outcome of the adjournment proposal.

Proxy Solicitation

We bear the cost of soliciting your vote. In addition to mailing these proxy materials, our directors, officers or employees may solicit proxies or votes in person, by telephone or by electronic communication. They will not receive any additional compensation for these solicitation activities.

We will enlist the help of banks and brokerage firms in soliciting proxies from their customers and reimburse the banks and brokerage firms for related out-of-pocket expenses.

 

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We retained Georgeson Inc. to aid in soliciting votes for the Special Meeting for a total fee of $75,000 plus reasonable expenses.

Change of Vote and Revocation of Proxies

If you are a registered shareholder and would like to change your vote after submitting your proxy but prior to the Special Meeting, you may do so by (a) signing and submitting another proxy with a later date, (b) voting again by telephone or the Internet or (c) voting at the Special Meeting. Alternatively, if you would like to revoke your proxy, you may submit a written revocation of your proxy to our Corporate Secretary at Kraft Foods Inc., Three Lakes Drive, Northfield, Illinois 60093.

If your shares are held in street name, contact your bank, broker or other nominee for specific instructions on how to change or revoke your vote. Please refer to Question 14 of the section of this Proxy Statement entitled “Questions and Answers About the Special Meeting and Voting” for additional details about voting.

Kraft Foods’ Auditors

Representatives of PricewaterhouseCoopers LLP are not expected to be present at the Special Meeting and accordingly will not make any statement or be available to respond to any questions.

 

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ITEM 1

ISSUANCE OF SHARES OF OUR COMMON STOCK

IN CONNECTION WITH OUR PROPOSED ACQUISITION OF CADBURY

General

You are being asked to consider and vote on a proposal to approve Kraft Foods issuing up to 370 million shares of our common stock in connection with the proposed Cadbury acquisition, including any issuance of shares of our common stock to finance the Cadbury acquisition.

On December 4, 2009, we made an offer to acquire each outstanding Cadbury ordinary share, including each share represented by Cadbury ADSs, in exchange for 0.2589 shares of our common stock and 300 pence in cash. As one Cadbury ADS represents four Cadbury ordinary shares, holders of Cadbury ADSs will be entitled to receive 1.0356 shares of our common stock and 1,200 pence in cash for each Cadbury ADS they tender in the offer. We are making this offer on the terms set forth in the December 4 offer documents and described in this Proxy Statement. The Cadbury Board has recommended that Cadbury shareholders reject this offer. However, if the Cadbury Board later decides to recommend our offer, it is possible that we will agree with Cadbury to acquire all of the outstanding share capital of Cadbury through a U.K. “scheme of arrangement,” which is a court-approved acquisition voted on by Cadbury shareholders. The share issuance proposal gives us the flexibility to make this change without another shareholder vote.

Subject to certain limited exceptions, Section 312.03(c) of the NYSE listed company manual requires that our shareholders approve any issuance of shares of common stock in any transaction or series of related transactions if (a) the common stock will have upon issuance voting power equal to or in excess of 20% of the voting power outstanding before the issuance or (b) the number of shares of common stock to be issued is equal to or in excess of 20% of the number of shares of common stock outstanding before the issuance of the common stock.

Based upon publicly available information as of December 15, 2009, if we acquire 100% of the outstanding Cadbury ordinary shares, including those represented by Cadbury ADSs, and assuming all outstanding options to purchase Cadbury ordinary shares are exercised, on the financial terms described in this Proxy Statement, we expect to issue up to 370 million shares of our common stock. Because this number will be greater than 20% of the total number of shares of our common stock outstanding prior to the issuance, we are required to obtain shareholder approval for issuing these shares under the listing requirements of the NYSE.

These estimates are based on information currently available to us and assume that:

 

•

all of the outstanding Cadbury ordinary shares, including those represented by Cadbury ADSs, the total number of which is 1,372,841,165 as of December 15, 2009, are exchanged for shares of our common stock pursuant to the terms of the offer set forth in the December 4 offer documents and described in this Proxy Statement; and

 

•

all 40,636,259 Cadbury ordinary shares that could be issued to satisfy the exercise and vesting of options and awards under Cadbury share schemes (assuming exercise and vesting of such options and awards in full) as at the close of business on December 9, 2009 (as disclosed in the Solicitation/Recommendation Statement on Schedule 14D-9 filed by Cadbury on December 14, 2009), are exercised for Cadbury ordinary shares and are exchanged for shares of our common stock pursuant to the terms of the offer set forth in the December 4 offer documents and described in this Proxy Statement.

These assumed share numbers total 1,413,477,424 Cadbury ordinary shares, which when multiplied by 0.2589, the exchange ratio for each Cadbury ordinary share tendered in the offer, would result in the issuance of 365,949,305 shares of our common stock. We have rounded this number to 370 million.

 

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It is also possible that we will decide to issue common stock, or securities convertible into common stock, in a public or private offering to finance the Cadbury acquisition. Under NYSE rules, such issuance might be considered part of the Cadbury acquisition for the purpose of the 20% threshold described above.

If we decide to make any related public or private offering of our common stock, or if any term of the Cadbury acquisition described in this Proxy Statement changes, in each case in a manner that we believe is material to our shareholders, we will supplement this Proxy Statement to inform you of such change and, if legally required, resolicit proxies from our shareholders.

Your approval of Item 1 will constitute an approval of the share issuance in connection with the proposed Cadbury acquisition, including any related financing transaction, regardless of the form of, procedures for or final terms of the acquisition or financing.

Additionally, subject to certain limited exceptions, Section 312.03(b) of the NYSE listed company manual requires shareholder approval prior to the issuance of common stock in any transaction or series of related transactions, to:

 

•

a director, officer or substantial security holder of the company (each a “related party”);

 

•

a subsidiary, affiliate or other closely related person of a related party; or

 

•

any company or entity in which a related party has a substantial direct or indirect interest,

if, in any such case, the number of shares of common stock to be issued exceeds either 1% of the number of shares of common stock or 1% of the voting power outstanding before the issuance.

If the issuance of our common stock in connection with the Cadbury acquisition, including any financing transaction, is deemed to require shareholder approval under this rule, the approval of Item 1 by our shareholders will also constitute approval for such purpose.

Effect of Shareholder Approval

We estimate that, if we issued all 370 million of the shares we are seeking approval to issue, existing Kraft Foods shareholders would own approximately 80% of the shares of our common stock outstanding immediately after the offer is completed. For a discussion of the assumptions on which we based this estimate, please see the section of this Proxy Statement entitled “The Offer—Ownership of Kraft Foods After Completion of the Cadbury Acquisition.”

Registration Statement

We have filed a registration statement on Form S-4 to register with the SEC the shares of our common stock to be issued to Cadbury shareholders in connection with the proposed Cadbury acquisition. We may also file amendments to that registration statement. You should read the Form S-4 and any amendments as they contain important information. If the form of the Cadbury acquisition changes to a U.K. “scheme of arrangement,” the Form S-4 will not be required. You may obtain copies of the Form S-4 (and any amendments) free of charge from the SEC at the SEC’s web site at www.sec.gov, at our web site at www.kraftfoodscompany.com or by directing a request as follows:

 

By mail:		By fax:		By e-mail:
Kraft Foods Inc. c/o Georgeson Inc. Attention: Christopher Cinek 199 Water Street, 26th Floor New York, NY 10038		(877) 260-0406 (toll-free within the U.S.) (212) 440-9009 (from outside the U.S.) Attention: Christopher Cinek		ccinek@georgeson.com

 

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Preemptive Rights

Holders of our common stock will not have preemptive rights in connection with the share issuance.

Appraisal/Dissenters’ Rights

No appraisal or dissenters’ rights are available to our shareholders in connection with the share issuance proposal or the Cadbury acquisition.

Recommendation of the Board

The Board has unanimously determined that the issuance of shares of our common stock in connection with the proposed acquisition of Cadbury, including any related financing transaction, is in the best interest of Kraft Foods and its shareholders. The Board unanimously recommends that you vote for the share issuance proposal.

Reasons for the Cadbury Acquisition and Share Issuance

In evaluating our proposed acquisition of Cadbury, including issuing shares of our common stock in connection with the Cadbury acquisition, our Board consulted with our management, as well as our legal and financial advisors, and, in reaching its decision to recommend the issuance of shares of our common stock in connection with the proposed Cadbury acquisition, our Board considered a number of factors. These factors included the following:

 

•

Facilitate the Cadbury Acquisition—The share issuance will facilitate the Cadbury acquisition.

 

•

Compelling Financial Rationale—We believe that the financial rationale for the share issuance and the Cadbury acquisition is compelling and will provide short- and long-term benefits to our existing shareholders. In particular, we believe that:

 

•

the Cadbury acquisition will be accretive to earnings in the second year following completion on a cash basis (which excludes the one-time expenses related to the Cadbury acquisition and the impact of non-cash items such as the amortization of intangibles after the acquisition);

 

•

the Cadbury acquisition is supported by our balance sheet and will deliver a return on investment in excess of our cost of capital within an acceptable timeframe;

 

•

we will retain our investment-grade credit rating; and

 

•

we will maintain our dividend.

 

•

Global Powerhouse—We believe the Cadbury acquisition would build on a global powerhouse in snacks, confectionery and quick meals, with an exceptional portfolio of leading brands around the world.

 

•

Increased Scope—We believe the Cadbury acquisition would create a combined company that is a global confectionery leader. The combined company is expected to have a portfolio that includes more than 40 confectionery brands each with annual sales in excess of $100 million. Globally, the combined company is expected to be number one in the chocolate and sugar confectionery segments and a strong number two in the high growth gum segment.

 

•

Complementary Brands—We believe that Cadbury’s leading brands such as Cadbury, Trident and Halls are highly complementary to our portfolio and would benefit from our global scope, scale and array of proprietary technologies and processes.

 

•

Increased Scale—We believe that confectionery markets are consolidating and scale is becoming increasingly important, in part due to retailers’ increasing bargaining power, control of the supply chain and growing portfolio of their own retailer brands, which have benefited from the global economic climate. We believe that the combination of Kraft Foods and Cadbury would provide the necessary scale to compete even more effectively in the confectionery sector. Furthermore, as our customers

 

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grow and consolidate, we believe that there are benefits to growing along with them and that the Cadbury acquisition will allow us to act as a stronger partner, create efficiencies for both partners and maintain balance as our customers increase their scale.

 

•

Strengthened Geographic Footprint—Cadbury’s geographic footprint is complementary to ours. Importantly, the Cadbury acquisition would increase scale in developing markets for both companies. Our operations in developing markets currently deliver revenues twice those of Cadbury’s. Our businesses in Brazil, China and Russia are, in the aggregate, about three times larger than Cadbury’s businesses in those countries. Conversely, we believe that Cadbury would provide us with a meaningful entry into India and South Africa and would be transformational in Mexico. We also believe that the combined company would have improved positions in several developed markets, such as France and Spain.

 

•

Complementary Routes to Market—We believe that Kraft Foods’ and Cadbury’s routes to market are highly complementary. We believe that we are particularly strong in the grocery channel in North America and Western Europe. We believe that Cadbury is well positioned in instant consumption channels, which have become increasingly important in both developed and developing markets. It is anticipated that the Cadbury acquisition will provide an enhanced platform for the combined company to distribute both Cadbury and Kraft Foods’ products through both channels and create an attractive opportunity for higher growth and margins.

 

•

Meaningful Cost Savings and Other Synergies—Although no assurance can be given that any particular level of cost savings and other synergies will be achieved, we believe the Cadbury acquisition will provide the potential for meaningful revenue synergies over time from investments in distribution, marketing and product development. In addition, we believe that there is a significant opportunity to realize substantial annual pre-tax cost savings.

Our Board also considered the potential risks of the share issuance, the Cadbury acquisition and the offer, including those set forth in the section of this Proxy Statement entitled “Risk Factors.”

The foregoing discussion of the information and factors considered by our Board is not intended to be exhaustive, but is believed to include the material factors considered by our Board. In view of the wide variety of factors considered by our Board in connection with its evaluation of the share issuance, the offer and the Cadbury acquisition, our Board did not consider it practical to, and did not, quantify, rank or otherwise assign specific weights to the factors that it considered in reaching its determination and recommendation. In considering the factors described above and other factors, individual members of our Board may have given different weight to different factors. Our Board considered this information as a whole, and overall considered the information and factors to be favorable to, and in support of, its determinations and recommendation.

This explanation of our Board’s reasoning and all other information presented in this section are forward-looking in nature and, therefore, you should read them in light of the factors discussed in the section of this Proxy Statement entitled “Forward-Looking Statements.”

Timing of the Cadbury Acquisition

Under the U.K. Takeover Code, the offer to acquire Cadbury ordinary shares, including those represented by Cadbury ADSs, must become or be declared wholly unconditional by February 2, 2010 or the offer will lapse, unless the U.K. Takeover Panel consents to a further extension or a competing offer is made for Cadbury. The offer will become or be declared wholly unconditional when all of the conditions of the offer, as described in the section of this Proxy Statement entitled “The Offer—Conditions of the Offer,” have been satisfied or validly waived. We anticipate that if the Cadbury acquisition is consummated on the terms set forth in the December 4 offer documents and described in this Proxy Statement and that if we acquire sufficient shares to enable us to implement a compulsory acquisition, we will be able to acquire all of the outstanding share capital of Cadbury in the first quarter of 2010.

 

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ITEM 2

ADJOURNMENT OF THE SPECIAL MEETING

Shareholders are being asked to consider and vote upon a proposal to approve any adjournment of the Special Meeting, including, if necessary, to solicit additional proxies in favor of the share issuance proposal if there are not sufficient votes to approve such share issuance proposal.

Our Board unanimously recommends that you vote for the adjournment proposal.

 

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THE COMPANIES

Kraft Foods

We are the world’s second largest food company, with revenues of $41.9 billion and earnings from continuing operations before income taxes of $2.6 billion in 2008. We have approximately 100,000 employees worldwide and manufacture and market packaged food products, including snacks, beverages, cheese, convenient meals and various packaged grocery products. We sell our products to consumers in approximately 150 countries. At December 31, 2008, we had operations in more than 70 countries and made our products at 168 manufacturing and processing facilities worldwide. At September 30, 2009, we had net assets of $25.2 billion and gross assets of $66.7 billion. We are a member of the Dow Jones Industrial Average, Standard & Poor’s 500, the Dow Jones Sustainability Index and the Ethibel Sustainability Index.

We have a proven track record of successfully completing and integrating strategic combinations to build and grow iconic brands and multi-national businesses. These acquisitions include LU Biscuit in 2007 and Nabisco in 2000.

Our portfolio includes nine brands with annual revenues exceeding $1.0 billion each, including Kraft cheeses, dinners and dressings; Oscar Mayer meats; Philadelphia cream cheese; Maxwell House and Jacobs coffee; Nabisco cookies and crackers; Oreo cookies; Milka chocolates and LU biscuits. Our portfolio also includes more than 50 brands which each generate annual revenues of more than $100 million, including Côte d’Or, Toblerone, Marabou and Alpen Gold chocolates; Royal biscuits; and Kenco, Carte Noire and Grand’ Mère coffees.

Our strategy is centered on marketing and developing leading consumer brands and pursuing growth opportunities consistent with consumer trends in order to deliver shareholder value. Our increasing investment in snacks and quick meals and our portfolio of iconic brands aligns with growing consumer interest in convenience products and premium brands. Our focus on snacks and confectionery products fits well within our strategy of growth in instant consumption channels.

Four priorities have shaped our long-term strategy:

 

•

focusing on growth categories to transform into a leading snack, confectionery and quick meals company. This is being achieved through exiting lower growth and/or lower margin businesses and reinvigorating high cash flow businesses to fund growth;

 

•

expanding our footprint in rapidly growing developing markets to benefit from trading up by consumers and achieving the scale to establish cost-efficient infrastructure in key geographies;

 

•

increasing our presence in instant consumption channels as they continue to gain share versus grocery channels in the U.S. and European Union; and

 

•

enhancing margins by improving our portfolio mix and reducing costs while investing in quality.

We believe our key competitive strengths include:

 

•

our global scale;

 

•

our portfolio of leading brands;

 

•

a leading sales and distribution system;

 

•

a proven track record of acquiring and integrating large-scale new businesses; and

 

•

an experienced management team.

 

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We are a Virginia corporation with principal executive offices at Three Lakes Drive, Northfield, IL 60093. Our telephone number is (847) 646-2000 and our Internet address is www.kraftfoodscompany.com.

Our common stock trades on the NYSE under the symbol “KFT.”

Cadbury

Cadbury is an international confectionery business that generated £5.4 billion in total revenue from its global operations in 2008. At December 31, 2008, Cadbury operated in over 60 countries and had over 45,000 employees. Cadbury’s principal product segments are: chocolate, which contributed 46% of Cadbury’s revenue in 2008; gum, which contributed 33% of Cadbury’s revenue in 2008; and candy, which contributed 21% of Cadbury’s revenue in 2008 (in each case, excluding the revenues of Reading Scientific Services Limited).

Cadbury’s major brands by segment include:

 

•

Chocolate—Cadbury Dairy Milk, Cadbury Creme Egg, Flake and Green & Black’s;

 

•

Gum—Trident, Hollywood, Stimorol, Dentyne, Clorets and Bubbaloo; and

 

•

Candy—Halls, Maynard’s, The Natural Confectionery Co. and Cadbury Eclairs.

Cadbury is registered under the laws of England and Wales as a public limited company with its registered office (principal executive office) at Cadbury House, Sanderson Road, Uxbridge, England, UB8 1DH. Its telephone number is +44 1895 615000 and its Internet address is www.cadbury.com.

Cadbury ordinary shares trade on the LSE under the symbol “CBRY.” Cadbury ADSs trade on the NYSE under the symbol “CBY.”

 

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BACKGROUND OF THE PROPOSED CADBURY ACQUISITION

We continually review our strategic alternatives. In the summer of 2009, we gave serious consideration to whether or not a business combination with Cadbury could be accomplished on favorable terms.

On August 20, 2009, our Board met with members of senior management and certain of our financial advisors. The Board authorized Ms. Irene Rosenfeld, our Chairman and Chief Executive Officer, to approach Cadbury to ascertain its interest in a business combination.

On August 28, 2009, Ms. Rosenfeld met with Mr. Roger Carr, the Chairman of Cadbury, in London to express our interest in pursuing a business combination with Cadbury. Ms. Rosenfeld informed Mr. Carr that our Board had authorized her to make a proposal to acquire all of the outstanding Cadbury ordinary shares for 300 pence in cash and 0.2589 new shares of Kraft Foods common stock per Cadbury ordinary share. That same day, Ms. Rosenfeld sent Mr. Carr the following letter confirming their conversation and the proposal put forth by Ms. Rosenfeld at the meeting (footnotes omitted):

28 August 2009

Mr. R. Carr

Cadbury plc

Cadbury House

Sanderson Road

Uxbridge

UB8 1DH

Dear Roger,

I very much enjoyed meeting you this morning. As I explained, we believe that the combination of our companies would provide a compelling value proposition for both our shareholders. As analysts and industry observers have long speculated, our two great companies are highly complementary and a combination makes a great deal of strategic and financial sense. We believe that now is the time to pursue a transaction as a result of the significant opportunities available to both of us. We look forward to engaging in constructive, friendly discussions and working toward a positive outcome on a recommended basis.

We have great respect and admiration for Cadbury plc (“Cadbury”), its employees, its leadership and its proud heritage. We have also taken note of your recent performance and the successful ongoing implementation of your Vision Into Action programme. However, we believe that Cadbury’s prospects, ability to fully realise operational efficiencies and capacity to invest are necessarily constrained given its limited scale and scope relative to larger global competitors. We see few catalysts for sustained future value creation for Cadbury as a standalone entity. In contrast, we have concluded that we can strengthen both our companies by bringing them together, enhancing our worldwide scale and scope, and capitalising on significant opportunities to build a global leader in the food and snacking industry for the benefit of all of our respective stakeholders. In so doing, we are eager to build upon the success of your iconic brands and strong British heritage through increased investment and innovation.

Accordingly, I am writing to set out the details of a possible offer to combine Cadbury and Kraft Foods Inc. (“Kraft Foods”) (a “Possible Offer”), as approved by the Board of Directors of Kraft Foods. Subject to the pre-conditions set out below, Kraft Foods is prepared to offer 300 pence in cash and 0.2589 new Kraft Foods shares per Cadbury share, which values each Cadbury share at 755 pence (based on yesterday’s closing price of $28.42 for a Kraft Foods share and an exchange rate of 1.617 $/£). This price represents an attractive premium to any measure of the standalone value of Cadbury and fully reflects your recent performance and prospects. Specifically, this price represents a premium of:

 

•

44% over Cadbury’s share price of 524 pence on 3 July 2009, prior to recent analyst suggestions regarding potential sector consolidation;

 

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•

37% over Cadbury’s 90-day average share price of 553 pence in the period up to 27 August 2009, the last business day preceding this letter; and

 

•

31% over Cadbury’s share price of 578 pence at close yesterday.

We would also point out that this price is beyond any price at which Cadbury’s shares have traded since the demerger.

The Possible Offer would provide your shareholders with both value certainty and the opportunity to enjoy the significant value upside in the combined entity’s attractive growth prospects and considerable synergies. Kraft Foods would also offer a mix and match facility under which Cadbury shareholders could elect, subject to availability, to vary the proportions in which they would receive cash and new Kraft Foods shares.

I believe that the strategic and financial rationale for this transaction is compelling. The transaction would create:

 

•

a company with approximately $50 billion in revenues, with leading shares in snacking and an exceptional portfolio of confectionery and biscuit brands around the world;

 

•

a geographically diversified combined business, with leading positions and significant scale in key developing markets including India, Mexico, Brazil, China and Russia;

 

•

a strong presence in instant consumption channels in both developed and developing markets, expanding the reach and margin potential of the combined business; and

 

•

the potential for meaningful revenue synergies over time from investments in distribution, marketing and product development, as well as a significant opportunity to realise pre-tax cost savings of at least $625 million annually through increased operational efficiencies.

Kraft Foods has a proven track record of successfully completing and integrating strategic combinations to build iconic brands and multi-national businesses, including the acquisitions of LU in 2007 and Nabisco in 2000.

A combination with Cadbury is consistent with Kraft Foods’ stated strategic objective to build a high-performing global company by reframing our categories, capitalising on our established sales capabilities and driving down costs without compromising our commitment to high quality. Over the past three years, we have successfully positioned Kraft Foods for sustainable, profitable growth. A combination with Cadbury would mark a logical next step in our transformation as we shape the company into a more global, higher-growth and higher-margin entity.

Together, we would draw on the collective strengths of our two organisations and create a stronger, more competitive global company for the benefit of all stakeholders. We believe that the growth prospects and global scope of the enlarged entity should lead to increased opportunities for talented employees and managers of both companies. In addition, we confirm that the existing contractual employment rights, including pension rights, of all employees of Cadbury would be fully safeguarded.

The consideration required for the Possible Offer would be provided from a combination of Kraft Foods’ existing funds, new debt and the issuance of equity. Financing would be on the basis that Kraft Foods would maintain an investment-grade credit rating. The significant cash flow of the enlarged entity following a combination would allow for rapid debt paydown and the continued funding of growth initiatives.

 

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We, together with our legal advisers, have undertaken an analysis in relation to anti-trust matters. The complementary nature of our two businesses means that any antitrust concerns will be few, and limited in scope: we are confident that any issues can be appropriately addressed within the envisaged implementation timeframe. In this regard, we would suggest that our respective legal advisers meet at your earliest convenience, in order for our advisers to explain their analysis, and for next steps to be identified.

We believe it is in all parties’ interests to progress this transaction as swiftly as possible. Our senior management and advisers have already completed extensive analysis and due diligence based on publicly available information. Accordingly, our due diligence requirements are limited, confirmatory in nature and capable of being addressed within a compressed timeframe. Lazard is acting as our lead financial adviser. We have also retained Centerview Partners, Citigroup and Deutsche Bank as financial advisers. Our legal advisers are Clifford Chance; Cravath, Swaine & Moore; Gibson, Dunn & Crutcher; and Arnold & Porter.

It is Kraft Foods’ preference to implement any offer by means of a scheme of arrangement but we reserve the right to change this to a general offer. Any offer, if made, would be subject to the terms and conditions usually attaching to a scheme of arrangement, or offer, involving a UK public company.

The making of any offer would be subject to the following pre-conditions:

 

•

satisfactory completion of a limited due diligence review by Kraft Foods, including access to Cadbury’s internal plan and projections;

 

•

Kraft Foods obtaining satisfactory financing; and

 

•

a unanimous recommendation by the directors of Cadbury to vote in favour of the scheme, or if relevant, to accept the offer.

For the avoidance of doubt, this letter should not be construed in any regard as constituting an offer or evincing an intention to make an offer or inviting an offer or imposing an obligation to make an offer for Cadbury and any of its securities or otherwise giving rise to legal relations (save for the obligation to keep its terms confidential) and, in particular, does not constitute a firm intention to make an offer for the purposes of Rule 2.5 of The City Code on Takeovers and Mergers. This proposal is made on a strictly private and confidential basis. This letter shall be governed by and construed in accordance with English law.

We trust that our proposal makes clear our level of seriousness and enthusiasm for pursuing this opportunity. We are willing to commit substantial time and financial resources to do so. This matter has the highest priority for Kraft Foods and we are keen to have our advisers and executive team engage with yours so that we can progress this proposal in an expeditious manner.

Per our conversation, I look forward to hearing from you shortly.

Yours sincerely,

Irene B. Rosenfeld

 

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On August 31, 2009, Ms. Rosenfeld received the following letter from Mr. Carr stating that the Cadbury Board was not interested in the proposed business combination with Kraft Foods:

August 31, 2009

Ms. Irene B. Rosenfeld

Chairman & Chief Executive Officer Kraft Foods

Three Lakes Drive

Northfield, Illinois

60093

Dear Irene,

I have discussed your letter of 28 August with the Board of Directors of Cadbury plc.

The Board believes strongly in both the strategy and prospects of Cadbury as an independent company. The Cadbury business is unique in both category and geographical scope and we are confident in our standalone growth prospects.

As you will no doubt have seen, we are delivering against our Vision into Action plan as clearly demonstrated by our performance and we have the strength in our brands, together with the necessary scale in our categories and the management capacity to deliver substantial value to our shareholders.

Your proposal is unsolicited, unattractive and fundamentally undervalues Cadbury. Accordingly the Board, with the unqualified support of its advisers (Goldman Sachs, Morgan Stanley and UBS), unanimously rejects your proposal and confirms its commitment to its independent strategy.

Yours sincerely,

Roger Carr

Chairman, Cadbury plc

On September 7, 2009, concurrently with our public announcement of our proposal to acquire Cadbury, Ms. Rosenfeld sent Mr. Carr the following letter:

7 September 2009

Mr. R. Carr

Cadbury plc

Cadbury House

Sanderson Road

Uxbridge

UB8 1DH

Dear Roger,

Thank you for your letter in response to our discussion on 28 August and the letter I sent to you as a follow-up outlining our possible offer (a “Possible Offer”) for Cadbury plc (“Cadbury”). I have given careful consideration to your response.

Although I am disappointed that you rejected unequivocally our proposal, I remain committed to working toward a recommended offer and to maintaining a constructive dialogue. We are therefore disclosing publicly our Possible Offer as a means to encourage and further that process.

 

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I continue to believe strongly in the strategic rationale for combining our two companies and that our Possible Offer represents an attractive premium and a compelling value proposition for your shareholders.

As I outlined during our meeting, I believe we can strengthen both of our companies by bringing them together, enhancing their worldwide scale and scope, and capitalising on significant opportunities, building on the position of Kraft Foods Inc. (“Kraft Foods”) as a global powerhouse in snacks, confectionery and quick meals for the benefit of all of our respective stakeholders.

We understand the great sense of pride that you and your team have for Cadbury and its brands. We also have a long history of respecting and building iconic brands like Oreo, LU, Milka, Toblerone, Kenco, Philadelphia and Dairylea to name just a few. Kraft Foods is committed to building upon Cadbury’s success and strong British heritage through increased investment and innovation.

Our extensive combined global business network would create opportunities for talented Cadbury employees and managers across all areas of the combined enterprise. We would augment Kraft Foods’ and Cadbury’s world-class capabilities by employing a “best of both” focus, from sales and marketing to distribution and manufacturing. For example, we believe we would be in a position to continue to operate the Somerdale facility, which is currently planned to be closed, and invest in Bournville, thereby preserving UK manufacturing jobs.

I also want to reiterate that our Possible Offer represents a compelling value proposition for your shareholders. Given the proposed consideration mix of cash and shares, they would enjoy both value certainty and significant potential upside in the combined entity’s attractive growth prospects and meaningful synergies. As we discussed, and as I noted in my previous letter to you, we commend you on your successful ongoing implementation of Vision Into Action (“VIA”). I believe Cadbury’s share price already reflects its prospects as a standalone entity and the benefits of VIA. Our Possible Offer therefore not only takes into account these factors, but also provides a significant premium and, I believe, significantly more value for your shareholders than Cadbury could create independently.

Together, we can draw on the collective strengths of our two organisations to create a stronger, more competitive global company for the benefit of all our stakeholders. I would ask you to reconsider your rejection of our Possible Offer and would welcome a constructive dialogue.

Yours sincerely,

Irene B. Rosenfeld

For the avoidance of doubt, this letter should not be construed in any regard as constituting an offer or evincing an intention to make an offer or inviting an offer or imposing an obligation to make an offer for Cadbury and any of its securities or otherwise giving rise to legal relations and, in particular, does not constitute a firm intention to make an offer for the purposes of Rule 2.5 of The City Code on Takeovers and Mergers. This letter shall be governed by and construed in accordance with English law.

On September 7, 2009, we issued a press release setting forth the terms of our proposal and the text of our August 28, 2009 and September 7, 2009 letters.

On the same day, September 7, 2009, the Cadbury Board summarily rejected our proposal in the following statement issued via press release:

In response to the announcement by Kraft Foods Inc. (“Kraft Foods”), Cadbury plc (“Cadbury” or the “Group”) confirms that it recently received an unsolicited proposal from Kraft Foods regarding a possible share and cash offer for the Group which is conditional on, inter alia, financing and due diligence. The Board of Cadbury reviewed the proposal with its advisers and rejected it.

 

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The Board is confident in Cadbury’s standalone strategy and growth prospects as a result of its strong brands, unique category and geographic scope and the continued successful delivery of its Vision into Action plan. The Board believes that the proposal fundamentally undervalues the Group and its prospects.

On September 12, 2009, Ms. Rosenfeld received the following letter from Mr. Carr reiterating Cadbury’s opposition to our proposal and Cadbury’s commitment to remaining an independent company.

Dear Irene,

In my letter of 31st August, I informed you that the Board had rejected your unsolicited proposal on the grounds that it is unattractive and fundamentally undervalues Cadbury. Under your proposal, Cadbury would be absorbed into Kraft Foods’ low growth, conglomerate business model, an unappealing prospect which contrasts sharply with our strategy to be a pure play confectionery company. I also re-affirmed the Board’s confidence in our future prospects as an independent company. There is nothing in your letter dated 7th September, or your various announcements on and since that date, to change our view.

I would like to take the opportunity to expand on some points I made in my letter.

Over the past few years, Cadbury has completed a major corporate transformation through the acquisition of Adams and the demerger and sale of our beverage businesses. The disposal of Beverages provides the clear business focus we believe essential to achieve outstanding performance.

We have created a pure play confectionery business with strong brands occupying leading market positions in both developed markets and high growth emerging economies – a business of considerable inherent value, impossible to replicate and with a unique position in the global confectionery market. We have a clear set of targets, a track record of delivery accepted by the market and value enhancing plans to further exploit our proven growth platforms.

We have demonstrated through our performance to date that we have the scale, capabilities and resource to deliver on our commitments to shareholders. Since the Adams acquisition, our confectionery business has delivered top line growth of over 6%, we have increased our global market share by over 100 bps and generated comparable margin growth of over 200 bps, all while materially increasing spend on marketing and science and technology to drive innovation.

We have been able to demonstrate both organic and inorganic growth. The acquisition of Adams, together with more recent acquisitions, including Intergum and Sansei, provided scale and new growth opportunities in attractive product areas of gum and candy together with exposure to emerging markets that complemented our powerful British Commonwealth heritage.

Our integration of Adams achieved combined cost and revenue synergies of 14% by the end of 2006. We achieved this performance by reinvigorating sales growth, re-stimulating the acquired brands through increased marketing investment and widening the product range through greater commitment to product innovation.

We understand the attraction of our business and fully appreciate the value and benefits it would offer to those looking for superior growth and exposure to our attractive product segments and markets. Equally, the quality of our management, the momentum of our business, the power of our brands, the strength of our market positions and the spread of our global footprint continue to underpin our belief in the business and its prospects as an independent entity.

Finally, I would emphasise that the delivery of value to our shareholders remains at the top of our agenda. Your proposal is for Cadbury shareholders to exchange shares in a pure-play confectionery business for cash and shares in Kraft Foods, a company with a considerably less focused business mix and historically lower growth. In addition, the proposal is of uncertain value for Cadbury shareholders as underlined by the

 

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movement in the Cadbury share price since your announcement. Your proposal fundamentally fails to reflect the current value of Cadbury as a standalone business, its growth prospects and the potential synergies of a combined entity.

We are committed to the delivery of optimum value to our shareholders and our Board remains convinced that this is achieved through continuing to deliver our standalone pure play confectionery strategy.

Yours sincerely,

Roger Carr

Chairman, Cadbury plc

During October 2009, our Board met on several occasions with management and certain of our financial advisors to discuss the due diligence investigation conducted to date with respect to Cadbury by certain of our legal and other advisors, to discuss the terms of the proposed Cadbury acquisition and to approve the bridge facility described in the section of this Proxy Statement entitled “The Offer—Financing of the Cadbury Acquisition.”

On November 6, 2009, our Board met with management and certain of our financial advisors. At this meeting, our Board approved the terms of the Cadbury acquisition described in this Proxy Statement, including issuing shares of our common stock in connection with the Cadbury acquisition and the recommendation that our shareholders vote for the share issuance proposal and for the adjournment proposal.

On November 9, 2009, we announced a firm intention to make an offer to acquire all of the outstanding Cadbury ordinary shares, including those represented by ADSs, on the terms described in this Proxy Statement.

On that same day, November 9, 2009, the Cadbury Board issued a statement recommending that Cadbury shareholders reject our offer.

Between November 9, 2009 and December 4, 2009, our Board met several times with management to discuss the terms of the offer and to approve the December 4 offer documents.

On December 4, 2009, we commenced the offer by filing a registration statement on Form S-4 with the SEC, issuing a press release and summary advertisement regarding the commencement of the offer and mailing the December 4 offer documents. On December 7, 2009, we published a further summary advertisement and a formal notice regarding the offer.

On December 14, 2009, Cadbury filed a Solicitation/Recommendation Statement on Schedule 14D-9 with the SEC and published a U.K. defense document, reporting that the Cadbury Board unanimously rejected the offer and recommended that Cadbury shareholders take no action in relation to the offer.

On December 15, 2009, we issued a response to Cadbury’s defense document.

 

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THE OFFER

Terms of the Offer

On December 4, 2009, we made an offer to acquire each outstanding Cadbury ordinary share, including each share represented by Cadbury ADSs, in exchange for 0.2589 shares of our common stock and 300 pence in cash. As one Cadbury ADS represents four Cadbury ordinary shares, holders of Cadbury ADSs will be entitled to receive 1.0356 shares of our common stock and 1,200 pence in cash for each Cadbury ADS they tender in the offer. We are making the offer for all outstanding Cadbury ordinary shares, including those represented by Cadbury ADSs, as follows:

 

•

all holders of Cadbury ordinary shares who are U.S. holders or residents of Canada and all holders of Cadbury ADSs, wherever located, are receiving the prospectus/offer to exchange and related transmittal materials that we filed with the SEC on December 4, 2009 as part of a registration statement on Form S-4; and

 

•

all holders of Cadbury ordinary shares who are not U.S. holders or residents of Canada are receiving other offer documents,

in each case if, pursuant to the law and regulations applicable to such holders, they are permitted to receive the relevant documents.

The offer includes a mix and match facility whereby Cadbury shareholders who validly accept the offer may elect to vary the proportions in which they receive shares of our common stock and cash consideration subject to off-setting elections being made by other Cadbury shareholders. To the extent that elections cannot be satisfied in full, they will be reduced on a pro rata basis. Further, under all circumstances, the number of shares of common stock we will issue and the total cash consideration we will pay in the offer will not change as a result of elections under the mix and match facility.

If we acquire 90% or more of the Cadbury ordinary shares, including those represented by Cadbury ADSs, to which the offer relates, we intend to acquire the remaining Cadbury ordinary shares, including those represented by Cadbury ADSs, that we do not own through a “compulsory acquisition” procedure under the United Kingdom Companies Act of 2006, as amended. Cadbury shareholders will not have the right to vote in a compulsory acquisition. In a compulsory acquisition, Cadbury shareholders who do not accept the offer will receive the same consideration received by any accepting Cadbury shareholder in the offer, which includes the opportunity to elect, subject to availability, to participate in a mix and match facility. If we do not achieve this 90% threshold, the compulsory acquisition procedure cannot be implemented.

We reserve the right, in our sole discretion, at any time and from time to time consistent with the U.K. Takeover Code and U.S. tender offer rules, to change the terms of the offer including, among other things, by increasing the number of shares of common stock or amount of cash payable in the offer or introducing alternative forms or mixes of consideration that Cadbury shareholders may elect to receive or changing the form of or procedures for the Cadbury acquisition. If any term of the Cadbury acquisition set forth in the December 4 offer documents and described in this Proxy Statement changes in a manner that we believe is material to our shareholders, we will supplement this Proxy Statement to inform you of the change and, if legally required, resolicit proxies from our shareholders.

Conditions of the Offer

The offer is subject to the fulfillment of the conditions described below and other conditions that are customary for a comparable offer for a U.K. company. The offer will lapse unless these conditions have been and remain satisfied, fulfilled or, if capable of waiver, waived prior to the expiration of the offer. We cannot waive

 

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the “minimum acceptance condition,” the “shareholder approval condition” or the “NYSE listing condition” described below. We reserve the right to waive, in whole or in part, any or all of the other conditions of the offer, subject to applicable laws and regulations.

 

•

Minimum acceptance condition—We shall have received valid acceptances prior to expiration of the offer in respect of not less than 90% (or such lower percentage as we may decide) of the Cadbury ordinary shares to which the offer relates, including those represented by Cadbury ADSs, and of the voting rights attached to those shares; provided, that this condition will not be satisfied unless we have acquired or agreed to acquire more than 50% of the outstanding Cadbury ordinary shares, including those represented by Cadbury ADSs. The minimum acceptance condition cannot become or be declared satisfied until all of the other conditions have been satisfied, fulfilled or to the extent permitted, waived.

 

•

Shareholder approval condition—Our shareholders shall have approved all proposals required under certain rules of the NYSE to approve the issuance of our common stock in connection with the offer.

 

•

NYSE listing condition—The shares of our common stock to be issued in connection with the offer shall have been approved for listing on the NYSE and the registration statement on Form S-4 relating to such shares shall have been declared effective by the SEC and no stop order shall have been issued or proceedings for suspension of the effectiveness of the registration statement shall have been initiated by the SEC.

 

•

Antitrust approval conditions—We shall have received all applicable competition and antitrust approvals, including those from the European Commission and all applicable waiting periods under applicable competition or antitrust laws, including under the HSR Act, shall have expired or terminated. On December 14, 2009, the required waiting period under the HSR Act expired. In addition, no antitrust regulator or body shall have instituted any action or proceeding that would or might:

 

•

make the offer void or illegal;

 

•

require, prevent or delay the divesture by any of Kraft Foods, Cadbury or their respective subsidiaries of all or part of its business or impose any limitation on its ability to conduct its business; or

 

•

impose any limitation on the ability of any of Kraft Foods, Cadbury or their respective subsidiaries to conduct, integrate or coordinate its business.

The U.K. Takeover Code requires us to obtain the consent of the U.K. Takeover Panel before we can invoke any condition to the offer (other than the minimum acceptance condition and conditions in respect of European Commission merger approval). In practice, even if a condition has not been satisfied by its terms, the U.K. Takeover Panel will only give such consent where the circumstances underlying the failure of the condition are of material significance to us in the context of the offer. Because of this consent requirement, the conditions may provide us less protection than the customary conditions in a comparable offer for a U.S. company. Please see the section of this Proxy Statement entitled “Risk Factors—Risk Factors Relating to the Proposed Cadbury Acquisition and the Offer—Even if a material adverse change to Cadbury’s business or prospects were to occur, in certain circumstances, we may not be able to invoke the offer conditions and terminate the offer, which could reduce the value of our common stock.”

Accounting Treatment

We will account for the Cadbury acquisition in accordance with U.S. GAAP, as treated within the acquisition method of accounting for business combinations. Under this method of accounting, we will record the

 

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exchange of Cadbury ordinary shares, including those represented by Cadbury ADSs, for our common stock based on the fair value of the consideration given, which is the market value of our common stock issued in connection with the offer (based on the closing share price on the date the minimum acceptance condition is satisfied or we otherwise acquire Cadbury) and the cash consideration paid in the offer, as the purchase price of Cadbury. We will allocate the purchase price to the net tangible and identifiable intangible assets acquired and liabilities assumed based on their respective fair values at the date the minimum acceptance condition is satisfied or we otherwise acquire Cadbury. Any excess of the purchase price over those fair values will be recorded as goodwill.

Definite lived intangible assets will be amortized over their estimated useful lives. Intangible assets with indefinite useful lives and goodwill will not be amortized but will be tested for impairment at least annually. All intangible assets and goodwill are also tested for impairment when certain indicators are present. If in the future, we determined that intangible assets or goodwill are impaired, an impairment charge would be recorded at that time.

The purchase price allocation reflected in the pro forma information included in this Proxy Statement is based on preliminary assumptions. The amount of the estimated purchase price allocated to goodwill and intangibles is approximately $18.5 billion. The final purchase price allocation, which will be based in part on detailed valuation studies which have not yet been completed, may result in an increase or decrease in finite-lived intangible assets which could result in a material increase or decrease in the estimated amortization of intangible assets included in the pro forma information included in this Proxy Statement. We expect to complete the final purchase price allocation no later than 12 months following the date the minimum acceptance condition is satisfied or we otherwise acquire Cadbury.

Ownership of Kraft Foods After Completion of the Cadbury Acquisition

We estimate that, if we issued all 370 million of the shares we are seeking approval to issue, existing Kraft Foods shareholders would own approximately 80% of the shares of our common stock outstanding immediately after the Cadbury acquisition, including any related equity financing, is completed. Our estimate is based on information currently available to us and assumes that:

 

•

all of the outstanding Cadbury ordinary shares, including those represented by Cadbury ADSs, the total number of which is 1,372,841,165 as of December 15, 2009, are exchanged for shares of our common stock pursuant to the terms of the offer set forth in the December 4 offer documents and described in this Proxy Statement; and

 

•

all 40,636,259 Cadbury ordinary shares that could be issued to satisfy the exercise and vesting of options and awards under Cadbury share schemes (assuming exercise and vesting of such options and awards in full) as at the close of business on December 9, 2009 (as disclosed in the Solicitation/Recommendation Statement on Schedule 14D-9 filed by Cadbury on December 14, 2009), are exercised for Cadbury ordinary shares and are exchanged for shares of our common stock pursuant to the terms of the offer set forth in the December 4 offer documents and described in this Proxy Statement.

These assumed share numbers total 1,413,477,424 Cadbury ordinary shares, which when multiplied by 0.2589, the exchange ratio for each Cadbury ordinary share tendered in the offer, would result in the issuance of 365,949,305 shares of our common stock. We have rounded this number to 370 million.

Federal Income Tax Consequences of the Share Issuance

Our issuance of shares of our common stock in connection with the proposed Cadbury acquisition will not result in any U.S. federal income tax consequences to Kraft Foods’ shareholders or us.

 

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Regulatory Approvals

Antitrust in the United States

Under the HSR Act and the related rules and regulations that have been issued by the Federal Trade Commission (the “FTC”), certain acquisition transactions may not be consummated until certain information and documentary material (“Premerger Notification and Report Forms”) have been furnished to the FTC and the Antitrust Division of the Department of Justice (the “Antitrust Division”) and certain waiting period requirements have been satisfied. These requirements of the HSR Act apply to our proposed acquisition of Cadbury ordinary shares, including those represented by Cadbury ADSs.

Under the HSR Act, our purchase of Cadbury ordinary shares, including those represented by Cadbury ADSs, pursuant to the offer, was subject to a 30-day waiting period following our filing of a Premerger Notification and Report Form concerning the proposed Cadbury acquisition with the FTC and the Antitrust Division. We filed a Premerger Notification and Report Form on November 9, 2009 with the FTC and the Antitrust Division in connection with the proposed purchase of Cadbury ordinary shares, including those represented by Cadbury ADSs, pursuant to the offer. On December 14, 2009, the required waiting period under the HSR Act expired.

At any time before or after our purchase of Cadbury ordinary shares, including those represented by Cadbury ADSs, the Antitrust Division or the FTC could take such action under the antitrust laws as it deems necessary or desirable in the public interest, including seeking to enjoin our purchase of Cadbury ordinary shares or seeking the divestiture of Cadbury ordinary shares acquired by us or the divestiture of substantial assets of Cadbury or its subsidiaries.

In addition, the proposed Cadbury acquisition may be reviewed by the attorneys general in the various states in which we and Cadbury operate. These authorities may claim that there is authority, under the applicable state and federal antitrust laws and regulations, to investigate and/or disapprove of the Cadbury acquisition under the circumstances and based upon the review set forth in applicable state laws and regulations. We cannot assure you that one or more state attorneys general will not attempt to file an antitrust action to challenge the Cadbury acquisition. Private parties also may seek to take legal action under the antitrust laws in some circumstances.

European Commission Merger Regulation

Both Kraft Foods and, based on publicly available information, Cadbury, sell products to customers based in the European Union. The EC Merger Regulation (Council Regulation (EC) 139/2004) requires notification of and approval by the European Commission of mergers or acquisitions involving parties with worldwide and European Union sales exceeding given thresholds. We have filed a notification of the offer with the European Commission. The European Commission will issue its decision in light of the limited remedies proposed by us to address certain competition concerns identified by the European Commission on January 6, 2010.

Other Foreign Competition Law Filings

Both Kraft Foods and, based on publicly available information, Cadbury, sell products in a number of other jurisdictions throughout the world, where antitrust filings or approvals are required or advisable in connection with the completion of the proposed Cadbury acquisition.

We expect the offer to receive all necessary regulatory clearances under applicable U.S. and EU antitrust laws and in all other countries where approval is required. The clearance process is underway with the relevant antitrust authorities and we remain confident that any issues will be limited in scope and can be appropriately addressed.

However, we cannot assure you that all of the regulatory approvals described above will be obtained and, if obtained, we cannot assure you as to the timing of any approvals, our ability to obtain the approvals on

 

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satisfactory terms or the absence of any litigation challenging such approvals. We also cannot assure you that the Department of Justice, the FTC or any state attorney general, the European Commission or any other governmental entity or any private party will not attempt to challenge the completion of the Cadbury acquisition on antitrust grounds, and, if such a challenge is made, we cannot assure you as to its result.

Financing of the Cadbury Acquisition

To the extent that the cash consideration under the offer is not funded from our own resources and/or proceeds from alternative funding sources, we expect to use borrowings under the bridge facility described below, to refinance certain indebtedness of Cadbury and its subsidiaries and to finance the offer. Borrowings under the Loan Agreement (as defined below) are available for general corporate purposes of Kraft Foods and its subsidiaries.

On November 9, 2009, we entered into an agreement (the “Loan Agreement”) for a senior unsecured term loan facility with, among others, the lenders listed below and Citigroup Global Markets Inc., Deutsche Bank Securities Inc. and HSBC Securities (USA) Inc., as joint bookrunners, Citibank, N.A. and Deutsche Bank AG Cayman Islands Branch, as co-administrative agents, Citibank, N.A., as paying agent, Deutsche Bank AG Cayman Islands Branch, as documentation agent, HSBC Securities (USA) Inc., as syndication agent and Citigroup Global Markets Inc., Deutsche Bank Securities Inc., HSBC Securities (USA) Inc., Barclays Capital, BBVA Securities Inc., BNP Paribas Securities Corp., Credit Suisse Securities (USA) LLC, RBS Securities, Inc. and SG Americas Securities, LLC, as joint lead arrangers. The Loan Agreement provides for borrowings by us and certain of our subsidiaries that may be designated by us in an aggregate principal amount of up to £5.5 billion. Under the Loan Agreement, we guarantee the obligations of any subsidiary borrower. Borrowings under the bridge facility will bear interest at a variable annual rate based on (a) LIBOR for borrowings in pounds sterling, (b) LIBOR or base rate, at our election, for borrowings in U.S. dollars and (c) EURIBOR for borrowings in euros, plus in each case an applicable margin based on the credit rating at that time for our long-term senior unsecured indebtedness. The Loan Agreement has a maturity date of 364 days following the initial borrowing thereunder.

The Loan Agreement requires the maintenance of a minimum total shareholders’ equity (excluding accumulated other comprehensive income or losses) of not less than $23 billion, which minimum level would be increased, in the event the Cadbury acquisition is consummated, by 75% of any increase in such total shareholders’ equity as a direct result of certain issuances by Kraft Foods of equity securities to finance the Cadbury acquisition or to refinance certain indebtedness. In addition, in the event that our long-term senior unsecured indebtedness is rated below investment grade (or not rated) by either Moody’s or S&P, the Loan Agreement requires us to maintain a leverage ratio (measured by the ratio of the total indebtedness (net of cash and cash equivalents) of Kraft Foods and its subsidiaries to the adjusted EBITDA of Kraft Foods and its subsidiaries) of not more than 4.25 to 1.00. The Loan Agreement also contains customary representations, covenants and events of default and requires the prepayment of advances and/or the permanent reduction of commitments under the bridge facility with the net cash proceeds received from certain disposals, debt issuances and equity capital markets transactions.

We may use a portion of Cadbury’s cash flow to repay indebtedness incurred in connection with the offer, including payments of interest, but we do not intend that security would be granted over Cadbury assets in connection with that indebtedness.

Subject to market conditions, we expect to refinance or reduce advances under the bridge facility from proceeds of alternative financing sources.

The initial lenders under the new facility are: Citibank, N.A.; Deutsche Bank AG Cayman Islands Branch; Deutsche Bank AG, London Branch; HSBC Bank USA, National Association; Barclays Bank PLC; Banco Bilbao Vizcaya Argentaria, S.A., New York Branch; BNP Paribas; Credit Suisse AG, Cayman Islands Branch; The Royal Bank of Scotland plc; and Société Générale.

 

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CERTAIN RELATIONSHIPS WITH CADBURY AND INTERESTS OF OUR

DIRECTORS AND EXECUTIVE OFFICERS IN THE SHARE ISSUANCE

Except as set forth in this Proxy Statement, neither Kraft Foods nor, to the best of our knowledge, any of our directors, executive officers or other affiliates has any contract, arrangement, understanding or relationship with any other person with respect to any securities of Cadbury, including, but not limited to, any contract, arrangement, understanding or relationship concerning the transfer or the voting of any securities, joint ventures, loan or option arrangements, puts or calls, guaranties of loans, guaranties against loss or the giving or withholding of proxies. Except as otherwise described in this Proxy Statement, there have been no contacts, negotiations or transactions since two years before the date of the mailing of this Proxy Statement, between Kraft Foods, any of our subsidiaries or, to the best of our knowledge, any of our directors, executive officers or other affiliates, on the one hand, and Cadbury or its affiliates, on the other hand, concerning a merger, consolidation or acquisition, an exchange offer or other acquisition of securities, an election of directors, or a sale or other transfer of a material amount of assets.

We have not effected any transaction in securities of Cadbury in the past 60 days. Except as set forth in this Proxy Statement, to our knowledge, after reasonable inquiry, none of our directors or executive officers nor any of their respective associates or majority owned subsidiaries, beneficially owns or has the right to acquire any securities of Cadbury or has effected any transaction in securities of Cadbury during the past 60 days.

 

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OWNERSHIP OF EQUITY SECURITIES

The following table shows the number of shares of common stock beneficially owned as of December 2, 2009, unless otherwise noted, by each director and named executive officer, as well as the number of shares beneficially owned by all of our directors and executive officers as a group. The table also provides information regarding each individual’s ownership of specified non-voting interests. None of our common stock owned by these individuals is subject to any pledge. Unless otherwise indicated, each of the named individuals has sole voting and investment power with respect to the shares shown.

 

		Amount and Nature of Beneficial Ownership of Common Stock as of December 2, 2009													Percent of Class		Non-Voting Interests
Name of Beneficial Owner		Shares			Restricted Shares		401(k) Interests(1)		Exercisable Stock Options(2)			Total					Phantom Stock			Deferred Shares
Banga, Ajaypal		—			—		—		—			—			*		—			13,151	(3)
Firestone, Marc		47,638			55,250		—		65,682			168,570			*		5,970	(4)		—
Hart, Myra		7,002			—		—		—			7,002			*		—			5,099	(3)
Juliber, Lois		2,309			—		—		—			2,309			*		—			9,361	(3)
Ketchum, Mark		—			—		—		—			—			*		—			13,151	(3)
Khosla, Sanjay		9,831			110,630		—		20,710			141,171			*		—			—
Lerner, Richard		—			—		—		—			—			*		1,986	(5)		21,077	(3)
McLevish, Timothy		18,943			75,220		—		31,350			125,513			*		—			—
Pope, John		22,054	(6)		4,989		—		3,995			31,038	(6)		*		—			—
Reynolds, Fredric		30,000			—		—		—			30,000			*		—			9,361	(3)
Rosenfeld, Irene		100,996	(7)		674,464		—		472,920	(8)		1,248,380	(7)(8)		*		—			—
Searer, Richard(9)		103,510			—		—		130,102			233,612			*		—			—
Wright, Deborah		14,032			—		—		3,995			18,027			*		—			9,361	(3)
Zarb, Frank		8,102	(10)		4,989		—		—			13,091	(10)		*		—			—
All directors and executive officers as a group (20 persons)(11)		444,152			1,231,382		10,922		821,165			2,507,621			*		7,956			127,061

 

*	Represents beneficial ownership of less than one percent of our issued and outstanding common stock on December 2, 2009.

 

(1)

Share equivalents representing compensation deferred by an executive officer pursuant to the Kraft Foods Thrift/TIP 401(k) Plans as of November 30, 2009. Funds are deemed to be invested in common stock and, under the terms of the plans, carry voting rights. An executive officer can elect to begin distributions upon reaching age 59 1/2 or upon retirement, at which time the share equivalents are distributed in cash. For a description of the voting rights relating to the 401(k) Plans, see Question 15 under “Questions and Answers About the Special Meeting and Voting.”

 

(2)	Stock options that are exercisable or will become exercisable within 60 days after December 2, 2009.

 

(3)	Shares that directors elected to defer until a specified date or termination of service as a director. Shares accumulate dividends, which are reinvested in common stock.

 

(4)	Stock appreciation rights payable in cash.

 

(5)

Share equivalents issued pursuant to the 2001 Compensation Plan for Non-Employee Directors and the 2006 Stock Compensation Plan for Non-Employee Directors. Each share is the economic equivalent of one share of common stock and is payable in cash on a date chosen by the director or upon termination of service as a director. Balance reported is as of December 2, 2009 and is based on the common stock closing price ($26.61) on December 2, 2009.

 

(6)	Includes 300 shares as to which Mr. Pope disclaims beneficial ownership, as the shares are held in trusts for his children’s benefit.

 

(7)	Includes 100 shares as to which Ms. Rosenfeld disclaims beneficial ownership, as the shares are held by her spouse.

 

(8)

Includes 300,000 stock options granted under the 2005 Performance Incentive Plan in connection with Ms. Rosenfeld’s appointment as Chairman. One-half of the shares under this performance-contingent stock option will vest only if the stock price maintains a trading price of $38.11 for at least ten trading days. The remaining one-half of the award will vest only if the stock price maintains a trading price of $41.43 for at least ten trading days. The stock options expire on May 2, 2017, and expire without vesting if the conditions are not met before that date.

 

(9)	Mr. Searer retired from Kraft Foods effective September 30, 2009.

 

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(10)	Includes 600 shares held in trust for the benefit of Mr. Zarb’s son and grandchildren and 1,500 shares held by his spouse.

 

(11)	This group also includes David Brearton, Michael Clarke, Karen May, Michael Osanloo, Jean Spence, Anthony Vernon and Mary Beth West.

Shown in the table below are those owners who are known to Kraft Foods to hold more that 5% of the issued and outstanding common stock. This information is based on Schedule 13G filings filed by each owner with the SEC prior to December 15, 2009:

 

Name and Address of Beneficial Owner		Amount and Nature of Beneficial Ownership		Percent of Common Stock
Warren E. Buffett		138,272,500		9.4	%
Berkshire Hathaway Inc.(1) 1440 Kiewit Plaza Omaha, Nebraska 68131
State Street Bank and Trust Company, acting in various fiduciary capacities(2)		77,028,187		5.2	%
State Street Financial Center One Lincoln Street Boston, Massachusetts 02111

 

(1)	Based on the Schedule 13G/A filed jointly by Mr. Buffett and his affiliates on February 17, 2009 with the SEC. Mr. Buffett and Berkshire Hathaway share voting and dispositive power over all reported shares, which include shares beneficially owned by certain subsidiaries of Berkshire Hathaway.

 

(2)

Based on the Schedule 13G filed by State Street Bank and Trust Company on February 17, 2009 with the SEC. State Street Bank and Trust Company has sole voting power over 60,808,062 shares, shared voting power over 16,220,125 shares and shared dispositive power over 77,028,187 shares. State Street Bank and Trust Company expressly disclaims beneficial ownership of all shares reported in the Schedule 13G pursuant to Rule 13d-4 of the Exchange Act.

 

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UNAUDITED U.S. GAAP PRO FORMA FINANCIAL INFORMATION

The following unaudited pro forma financial information for the year ended December 31, 2008, and for the six month period ended June 30, 2009, the date of the latest publicly available financial information of Cadbury, gives effect to the acquisition of Cadbury by Kraft Foods as if it had occurred on January 1, 2008. The following unaudited pro forma balance sheet information at June 30, 2009, gives effect to the acquisition of Cadbury by Kraft Foods as if it had occurred on June 30, 2009.

We are not affiliated with Cadbury, and we have not had the cooperation of Cadbury’s management or due diligence access to Cadbury or its business or management for the purposes of preparing this Proxy Statement. Therefore, non-public information concerning Cadbury’s business and financial condition was not available to us for the purpose of presenting pro forma combined financial data for the nine-month period ended September 30, 2009. We have requested current financial information from Cadbury, including financial information for the nine-month period ended September 30, 2009. Our legal advisors received a letter dated December 15, 2009 in which Cadbury rejected our request. However, if we do receive such information in a timely manner, we would compile pro forma combined financial data for the nine-month period ended September 30, 2009 and include it in this Proxy Statement.

The unaudited pro forma financial information included in this Proxy Statement is based on the historical financial statements of Kraft Foods and Cadbury and on publicly available information and certain assumptions which Kraft Foods believes to be reasonable, which are described in the notes to the statements below. Kraft Foods has not performed any due diligence or detailed valuation analysis necessary to determine the fair market values of the Cadbury assets to be acquired and liabilities to be assumed, and accordingly, except as described in note 4(a) below, the pro forma financial statements do not include an allocation of the purchase price to reflect the fair value of those assets and liabilities.

The unaudited pro forma financial information:

 

•

has been prepared for illustrative purposes only, and because of its nature, addresses a hypothetical situation and, therefore, does not represent the combined actual financial position or results of Kraft Foods and Cadbury;

 

•

does not purport to represent what the consolidated results of operations actually would have been if the Cadbury acquisition had occurred on January 1, 2008 or what those results will be for any future periods or what the consolidated balance sheet would have been if the Cadbury acquisition had occurred on June 30, 2009. The pro forma adjustments are based on information current as at December 1, 2009 (being the latest practicable date prior to the making of the offer); and

 

•

has not been adjusted to reflect any matters not directly attributable to implementing the Cadbury acquisition. No adjustment, therefore, has been made for actions which may be taken once the Cadbury acquisition is complete, such as any integration plans of Cadbury.

The unaudited pro forma financial information has been compiled from the following sources:

 

•

U.S. GAAP financial information on Kraft Foods has been extracted without material adjustment from Kraft Foods’ audited consolidated statements of earnings for the year ended December 31, 2008 contained in Kraft Foods’ Current Report on Form 8-K filed with the SEC on November 3, 2009 and incorporated by reference into this Proxy Statement, and unaudited consolidated statements of earnings for the six months ended June 30, 2009 and the unaudited consolidated balance sheet as at June 30, 2009 contained in Kraft Foods’ Quarterly Report on Form 10-Q, for the quarter ended June 30, 2009 and incorporated by reference into this Proxy Statement. Financial information from the reconciliations summarizing the material differences between U.S. GAAP and IFRS has not been adjusted to reflect any matters not directly attributable to implementing the Cadbury acquisition. No adjustment,

 

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therefore, has been made for actions which may be taken once the offer is complete, such as any integration plans of Cadbury.

 

•

IFRS financial information on Cadbury has been extracted without material adjustment, except for currency translation as noted below, from the Cadbury audited consolidated income statement for the year ended December 31, 2008, contained in Cadbury’s Annual Report on Form 20-F for the year ended December 31, 2008 and incorporated by reference into this Proxy Statement, and from the Cadbury unaudited consolidated statement of income for the six months ended June 30, 2009, and unaudited consolidated balance sheet as at June 30, 2009, contained in Cadbury’s Report on Form 6-K furnished to the SEC on July 29, 2009 and incorporated by reference into this Proxy Statement.

 

•

Unaudited adjustments have been made to align the Cadbury IFRS financial information with Kraft Foods’ U.S. GAAP accounting policies. Because Kraft Foods did not have any access to non-public or detailed financial statements of Cadbury, these adjustments have been estimated based on publicly available information. The basis for these adjustments is explained in the notes to the information accompanying the tables.

 

•

Kraft Foods translated its historical financial information based on the requirements of SFAS 52, using historical exchange rates, as described in the section of this Proxy Statement entitled “Currencies.” Cadbury translated its historical financial information based on the requirements of IFRS. Based on its review of Cadbury’s historical financial statements and understanding of the differences between U.S. GAAP and IFRS, Kraft Foods is not aware of any further adjustment that it would need to make to Cadbury’s historical financial statements relating to foreign currency translation. The pro forma adjustments in this table have been translated from £ to $ using Kraft Foods’ historic exchange rates. The average exchange rates applicable during the periods presented for the unaudited pro forma consolidated statements of earnings and the period end exchange rate for the unaudited pro forma consolidated balance sheet are:

 

				$/£1
December 31, 2008		Average Spot Rate		1.8758
June 30, 2009		Average Spot Rate		1.4812
June 30, 2009		Period End Rate		1.6439

The following pro forma financial statements should be read in conjunction with:

 

•

the accompanying notes to the Unaudited U.S. GAAP Pro Forma Financial Information;

 

•

the consolidated financial statements of Kraft Foods for the year ended December 31, 2008 and for the six months ended June 30, 2009 and the notes relating thereto, incorporated herein by reference;

 

•

the consolidated financial statements of Cadbury for the year ended December 31, 2008 and for the six months ended June 30, 2009 and the notes relating thereto, incorporated herein by reference; and

 

•

the section of this Proxy Statement entitled “Summary of Significant Differences Between IFRS and U.S. GAAP.”

 

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UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF EARNINGS

For the six months ended June 30, 2009

(in millions of U.S. dollars, except common share amounts and as indicated)

 

									Pro Forma Adjustments
		Kraft Foods				Cadbury IFRS (in £)			Cadbury IFRS (in $)			Cadbury U.S. GAAP Adjustments				Other				Note		Pro Forma Kraft Foods
Net revenues		$	19,558			£	2,767		$	4,098		$				$						$	23,656
Cost of sales			12,628										2,191							3(d), 3(j)			14,819
Gross profit			6,930				2,767			4,098			(2,191	)									8,837
Marketing, administration and research costs			4,131				2,461			3,645			(2,155	)						3(c), 3(g), 3(j)			5,621
Asset impairment and exit costs			(26	)			105			156													130
Losses / (gains) on divestitures, net			17																				17
Amortization of intangibles			9										24				9			3(b), 3(j), 4(d)			42
Operating income			2,799				201			297			(60	)			(9	)					3,027
Interest and other expense, net			592				89			132			(9	)			91			3(d), 3(j), 4(c)			806
Earnings from continuing operations before income taxes			2,207				112			165			(51	)			(100	)					2,221
Provision for income taxes			716				33			49			(13	)			(30	)		3(i), 4(e)			722
Earnings from continuing operations			1,491				79			116			(38	)			(70	)				$	1,499
Noncontrolling interest			4																				4
Earnings from continuing operations attributable to shareholders		$	1,487			£	79		$	116		$	(38	)		$	(70	)				$	1,495
Per share data attributable to shareholders:
Basic earnings per share from continuing operations		$	1.01																			$	0.81
Diluted earnings per share from continuing operations		$	1.00																			$	0.81

See notes to pro forma financial statements.

 

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UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF EARNINGS

For the year ended December 31, 2008

(in millions of U.S. dollars, except common share amounts and as indicated)

 

					Pro Forma Adjustments
		Kraft Foods			Cadbury IFRS (in £)				Cadbury IFRS (in $)				Cadbury U.S. GAAP Adjustments				Other				Note		Pro Forma Kraft Foods
Net revenues		$	41,932		£	5,384			$	10,099			$				$						$	52,031
Cost of sales			28,088											5,390							3(d), 3(j)			33,478
Gross profit			13,844			5,384				10,099				(5,390	)									18,553
Marketing, administration and research costs			8,862			4,802				9,008				(5,365	)						3(c), 3(g), 3(j)			12,505
Asset impairment and exit costs			1,024			194				364														1,388
Losses / (gains) on divestitures, net			92																					92
Amortization of intangibles			23											60				18			3(b), 3(j), 4(d)			101
Operating income			3,843			388				727				(85	)			(18	)					4,467
Interest and other expense, net			1,240			(12	)			(23	)			45				181			3(d), 3(j), 4(c)			1,443
Earnings from continuing operations before income taxes			2,603			400				750				(130	)			(199	)					3,024
Provision for income taxes			755			30				56				(34	)			(60	)		3(i), 4(e)			717
Earnings from continuing operations			1,848			370				694				(96	)			(139	)					2,307
Noncontrolling interest			9			2				4														13
Earnings from continuing operations attributable to shareholders		$	1,839		£	368			$	690			$	(96	)		$	(139	)				$	2,294
Per share data attributable to shareholders:
Basic earnings per share from continuing operations		$	1.22																				$	1.23
Diluted earnings per share from continuing operations		$	1.21																				$	1.22

See notes to pro forma financial statements.

 

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UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET

As at June 30, 2009

(in millions of U.S. dollars, except as indicated)

 

											Pro Forma Adjustments
				Kraft Foods				Cadbury IFRS (in £)			Cadbury IFRS (in $)			Cadbury U.S. GAAP Adjustments				Other				Note		Pro Forma Kraft Foods
ASSETS
Cash and cash equivalents				$	1,731			£	266		$	437		$				$	(435	)		4(a)i.		$	1,733
Short-term investments									98			161													161
Receivables					4,646				923			1,517			(395	)						3(j)			5,768
Inventories, net					4,011				849			1,396													5,407
Deferred income taxes					682										260							3(j)			942
Other current assets					618				166			273			395							3(j)			1,286
Total current assets					11,688				2,302			3,784			260				(435	)					15,297
Property, plant and equipment, net					10,224				1,762			2,897			(64	)						3(d), 3(e)			13,057
Goodwill					28,225				2,081			3,421			2,701				7,363			3(a), 4(a)ii.			41,710
Intangible assets, net					13,257				1,457			2,395			(865	)			3,470			3(b), 4(a)ii.			18,257
Other assets					1,260				297			488			(194	)						3(i), 3(j)			1,554
TOTAL ASSETS				$	64,654			£	7,899		$	12,985		$	1,838			$	10,398					$	89,875
LIABILITIES
Short-term borrowings				$	856			£	729		$	1,198		$	(822	)						3(j)		$	1,232
Current portion of long-term debt					759										822							3(j)			1,581
Accounts payable					3,225				1,345			2,211			(1,376	)						3(j)			4,060
Accrued marketing					1,869																				1,869
Accrued employment costs					847																				847
Other current liabilities					2,747				435			715			1,379				320			3(f), 3(j), 4(b)			5,161
Total current liabilities					10,303				2,509			4,124			3				320						14,750
Long-term debt					18,610				1,396			2,295							6,616			4(a)i.			27,521
Deferred income taxes					4,266				155			255			(441	)			1,042			3(i), 4(a)ii.			5,122
Accrued pension costs					2,209				482			792			210							3(c)			3,211
Accrued postretirement health care costs					2,682																				2,682
Other liabilities					2,204				270			444			170							3(g), 3(h)			2,818
TOTAL LIABILITIES					40,274				4,812			7,910			(58	)			7,978						56,104
Contingencies
EQUITY
Common stock, no par value
Additional paid-in capital					23,517				197			324							9,375			4(a)i.			33,216
Retained earnings					14,016				2,470			4,060			2,106				(6,486	)		4(a)i., 4(b)			13,696
Accumulated other comprehensive losses					(4,723	)			413			679			(210	)			(469	)		3(c), 4(a)i.			(4,723	)
Treasury stock, at cost					(8,514	)																			(8,514	)
Total Shareholders’ Equity					24,296				3,080			5,063			1,896				2,420						33,675
Noncontrolling interest					84				7			12													96
TOTAL EQUITY					24,380				3,087			5,075			1,896				2,420						33,771
TOTAL LIABILITIES AND EQUITY				$	64,654			£	7,899		$	12,985		$	1,838			$	10,398					$	89,875

See notes to pro forma financial statements.

 

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NOTES

 

1.	BASIS OF PRESENTATION

The unaudited pro forma financial information has been compiled from underlying financial statements prepared in accordance with U.S. GAAP and reflects the Cadbury acquisition by Kraft Foods.

The unaudited pro forma financial information should be read in conjunction with the underlying financial information from which it was extracted without material adjustment: (a) the audited consolidated financial statements of Kraft Foods as at and for the year ended December 31, 2008, and as at and for the six months ended June 30, 2009, each prepared in accordance with U.S. GAAP; (b) the audited consolidated financial statements of Cadbury as at and for the year ended December 31, 2008, and the unaudited interim financial information of Cadbury as at and for the six months ended June 30, 2009, each prepared in accordance with IFRS; and (c) the unaudited reconciliation of Cadbury’s IFRS financial statements to U.S. GAAP.

The underlying financial information of Kraft Foods has been derived from the unaudited consolidated financial statements of Kraft Foods contained in Kraft Foods’ Quarterly Report on Form 10-Q for the quarter ended June 30, 2009 and the audited consolidated financial statements of Kraft Foods contained in Kraft Foods’ Current Report on Form 8-K filed with the SEC on November 3, 2009. The underlying financial information for Cadbury has been derived from the unaudited consolidated financial statements of Cadbury contained in Cadbury’s Report on Form 6-K furnished to the SEC on July 29, 2009 and the audited consolidated financial statements of Cadbury contained in Cadbury’s Annual Report on Form 20-F for the year ended December 31, 2008.

The Cadbury acquisition has been treated as an acquisition, with Kraft Foods as the acquirer and Cadbury as the acquiree, assuming that the Cadbury acquisition had been completed on January 1, 2008, for the unaudited pro forma consolidated statements of earnings and on June 30, 2009, for the unaudited pro forma consolidated balance sheet.

This unaudited pro forma financial information is not intended to reflect the financial position and results which would have actually resulted had the Cadbury acquisition been effected on the dates indicated. Further, the pro forma results of operations are not necessarily indicative of the results of operations that may be obtained in the future. No account has been taken of the trading activity or other transactions of Kraft Foods or Cadbury for the period since June 30, 2009.

 

2.	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The unaudited pro forma financial information has been compiled in a manner consistent with the accounting policies adopted by Kraft Foods. These accounting policies differ in a number of significant respects from those of Cadbury. The adjustments made to align Cadbury’s IFRS financial information with Kraft Foods’ U.S. GAAP accounting policies are described in note 3.

The Cadbury balances have been translated from £ to $ using average exchange rates applicable during the periods presented for the unaudited pro forma consolidated statements of earnings and the period end exchange rate for the unaudited pro forma consolidated balance sheet.

 

3.	PRO FORMA U.S. GAAP ADJUSTMENTS

The following adjustments have been made to align the Cadbury IFRS financial information with Kraft Foods’ U.S. GAAP accounting policies. Because Kraft Foods did not have any access to non-public or detailed financials of Cadbury, these adjustments have been estimated based on publicly available information.

 

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(a)

Goodwill

Upon adoption of IFRS, entities were permitted to retain their historical GAAP accounting treatment for business combinations. Under U.K. GAAP, Cadbury wrote off goodwill acquired prior to 1998 against shareholder’s equity at the time of acquisition. Goodwill resulting from business combinations between 1998 and 2003 was capitalized, with subsequent measurement based on the attributes of the acquired business. Since the adoption of IFRS, both U.S. GAAP and IFRS require that goodwill not be amortized, and that it be tested on an annual basis for potential impairment.

For the purposes of U.S. GAAP, $2,701 million was added to goodwill to reflect the estimated net impact of accounting differences.

 

(b)	Intangible Assets

Prior to the adoption of IFRS, under U.K. GAAP, Cadbury was not required to recognize customer relationships as a separate identifiable intangible asset, which is recognized under U.S. GAAP. Cadbury exercised the IFRS 1 exemption not to restate business combinations upon adoption. As these intangibles are deemed to have a definite life, an amortization charge is recorded under U.S. GAAP that is not present under IFRS.

Also, under IFRS, when an entity increases its interest in an associate such that the associate is then consolidated, any fair value uplift related to the percentage ownership which it previously held is recorded in the financial statements as an increase in the related assets. Any offset to this fair value increase is recorded in shareholders’ equity.

For transactions completed before 2009, only the percentage of assets and liabilities acquired in each step of an acquisition are fair valued under U.S. GAAP; no revaluation of assets and liabilities previously acquired is made.

A net reduction of $865 million was made to intangible assets as of June 30, 2009, to reflect customer relationship and remove the fair value uplift. We recorded additional amortization expense of $21 million for the six months ended June 30, 2009, and $52 million for the year ended December 31, 2008, related to the customer relationship intangible assets.

 

(c)	Retirement Benefits

Upon the adoption of IFRS, Cadbury elected to recognize all cumulative actuarial gains and losses at the date of transition. Under IFRS, all future actuarial gains and losses are also recognized in full outside the income statement in retained earnings and presented in a statement of recognized income and expense. U.S. GAAP does not permit recognition of all actuarial gains and losses in a separate statement other than the primary income statement.

At June 30, 2009, $210 million of additional noncurrent liability was recorded to restore net actuarial losses that were not recognized under IFRS. For the periods ended June 30, 2009 and December 31, 2008, $30 million and $60 million of additional expense was recorded, respectively.

 

(d)	Interest Capitalization

Under IFRS, the capitalization of interest in relation to the construction of qualifying assets is optional and Cadbury does not capitalize such interest. Under U.S. GAAP, interest is required to be capitalized on capital construction projects and depreciated over the life of the asset.

 

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At June 30, 2009, $66 million of additional property was recorded to reflect this difference. Interest expense was reduced $9 million for the six months ended June 30, 2009 and $6 million for the year ended December 31, 2008, as the interest was capitalized. The net deferred tax impact of these adjustments is included in all the net deferred tax adjustments explained in note 3(i) below.

Also, depreciation expense of $3 million for the six months ended June 30, 2009, and $7 million for the year ended December 31, 2008, was recorded.

 

(e)	Property, Plant and Equipment

Under IFRS, when an increase in the interest in an entity results in the entity being consolidated, any fair value uplift related to the percentage ownership previously held is recorded in the financial statements as an increase in the related assets. Any off-set to this fair value increase is recorded in shareholders’ equity. For transactions completed before 2009, under U.S. GAAP, only the percentage of assets and liabilities acquired in each step of an acquisition are fair valued.

Also, Cadbury revalued certain properties under U.K. GAAP which was not permitted under U.S. GAAP. This remains a difference between the basis under IFRS and U.S. GAAP.

At June 30, 2009, a decrease of $130 million was recorded to property, plant and equipment for the net impact of these differences.

 

(f)	Derivatives

Under IFRS, certain derivative instruments were not required to be recognized on Cadbury’s balance sheet at fair value until January 3, 2005. Under U.S. GAAP, consistent with IFRS, all derivatives are recorded in the financial statements at fair value. As U.S. GAAP has required derivatives to be held on the balance sheet at fair value since January 1, 2001, there is a difference in the accounting for derivatives under IFRS and U.S. GAAP resulting in an additional liability of $3 million.

 

(g)	Employee Share Arrangements

Under IFRS, all of Cadbury’s employee share awards are equity settled and no liability is recognized for these awards. Expense is based upon the grant date fair value of the share awards. Under U.S. GAAP, certain plans containing inflation indexed earnings growth performance conditions would be accounted for under the liability method. This method requires a liability be recorded until the awards have vested. The fair value of each award classified as a liability must be remeasured at each reporting date until vesting.

An additional liability of $145 million was recorded in the balance sheet as of June 30, 2009, related to the plans accounted for under the liability method. In the statement of operations, additional compensation expense of $6 million and $17 million was recorded for the periods ended June 30, 2009 and December 31, 2008, respectively.

 

(h)	Deferred Gain on Sale and Leaseback of Land and Building

Under IFRS, profit or loss arising on the sale and operating leaseback of property, plant and equipment may generally be recognized in the period in which the sale takes place. Under U.S. GAAP, a sale and leaseback of property, plant and equipment must first qualify for such accounting and then the profit or loss appraised is recognized depending upon the amount of use that the seller will retain of the property. Otherwise, the gain must be deferred and recognized over the lease period.

 

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In 2006, Cadbury sold a property and leased it back resulting in the deferral of a gain of $25 million which is recognized over the lease term. Because we do not have sufficient information to determine the annual amount of the gain to be recognized, we adjusted the balance sheet for the deferral of the gain, however no adjustment has been made to the statement of operations.

 

(i)

Taxation

An interpretation of U.S. GAAP issued in 2006 clarifies that in order to recognize a tax benefit a position must be more likely than not to be sustained upon an audit. As this interpretation does not exist under IFRS, additional liabilities related to uncertain tax positions may exist under U.S. GAAP, however Kraft Foods does not have access to the information to estimate the amount of these liabilities and therefore no adjustment has been made for this difference.

For U.S. GAAP, deferred tax assets for share awards are recorded based on the recorded compensation expense. Under IFRS, deferred tax assets are adjusted to recognize the movement in the intrinsic value of the share awards at the year end. The amount recognized in the income statement is capped at the tax-effected share award charge, with any excess being recognized directly through reserves.

A historic difference related to the deferred tax on intangible assets remains after the transition to IFRS. Under U.K. GAAP, residual payments on certain acquisitions were classified as brand intangibles. Under U.S. GAAP, these were treated as goodwill. Under IFRS, the U.K. GAAP classification was maintained resulting in the recognition of deferred tax liabilities on these brand intangibles. Under U.S. GAAP, no deferred tax liability was recognized as these non-tax deductible amounts were classified as goodwill.

Also, deferred taxes have been provided on the pro forma U.S. GAAP adjustments.

Additional noncurrent assets of $66 million and reduction of noncurrent liabilities of $441 million were recorded as of June 30, 2009, for the net impact of the differences described above. In the statement of operations, income tax expense was reduced by $13 million for the six months ended June 30, 2009 and $34 million for the year ended December 31, 2008.

Also, under IFRS, Cadbury disclosed the gross deferred tax assets and liabilities as non-current. Under U.S. GAAP, deferred taxes are classified between current and non-current portion, depending on the items they relate to, disclosed separately and presented on a net basis, by tax jurisdiction. Note 3(j) further describes reclassification to reflect this difference.

 

(j)	Reclassifications

Certain balances were reclassified from the financial statements of Cadbury so their presentation would be consistent with Kraft Foods.

The following reclassifications were made to the balance sheet as at June 30, 2009 (in millions):

 

Receivables		$	(395	)
Other assets			395
Deferred income tax assets—current			260
Other noncurrent assets (deferred income tax assets)			(260	)
Accounts payable			(1,376	)
Other current liabilities			1,376
Short-term borrowings			(822	)
Current portion of long-term debt			822

 

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The following reclassifications were made to the statements of operations for the periods ended June 30, 2009 and December 31, 2008 (in millions):

 

		June 30, 2009				December 31, 2008
Cost of sales		$	2,188			$	5,383
Interest and other expense, net—the removal of interest income on postretirement employee benefits			—				51
Amortization of intangibles			3				8
Marketing, administration and research costs			(2,191	)			(5,442	)

 

4.	OTHER PRO FORMA ADJUSTMENTS

 

(a)	Estimated Purchase Consideration

Estimated purchase consideration and related excess purchase consideration over book value of net assets acquired are as follows (in millions):

 

						Notes
Cadbury shares outstanding as of December 1, 2009			1,373			i.
Estimated Cadbury shares issued pursuant to conversion of stock options, long term incentive plans, and change in control provisions			41
Total Cadbury shares and share equivalents prior to transaction			1,414
Exchange ratio			0.2589
Total Kraft Foods shares to be issued			366
Kraft Foods closing share price on December 1, 2009			26.50
Total value of Kraft Foods shares to be issued			9,699			i.
Total cash consideration paid at 300 pence per Cadbury share			7,051
Total purchase price			16,750
Less: book value of net assets acquired			(6,959	)		ii.
Less: fair value adjustment for identifiable intangible assets, net of tax			(2,428	)		ii.
Residual goodwill		$	7,363			ii.

 

i.	To complete the Cadbury acquisition, Cadbury will be acquired by Kraft Foods, pursuant to the offer in which each holder of one Cadbury ordinary share will be entitled to 300 pence in cash and 0.2589 shares of Kraft Foods common stock.

The ordinary share portion of the estimated purchase consideration was calculated using a price of $26.50 for each share of Kraft Foods common stock based on the closing share price of Kraft Foods common shares on the NYSE on December 1, 2009, the latest practicable date before we made the offer. The number of shares of Kraft Foods common stock assumed to be issued is 366.0 million.

For purposes of preparing these pro forma financial statements, Kraft Foods has assumed that funding will come from the bridge loan facility described in the section of this Proxy Statement entitled “The Offer—Financing of the Cadbury Acquisition” less cash acquired upon acquisition of Cadbury. The source of cash for an acquisition of Cadbury may or may not be in whole or in part from the bridge loan facility. The cash portion of the estimated purchase consideration, payable in U.K. pounds, was translated based on an exchange rate of £1 : $1.6627 on December 1, 2009, the latest practicable date before we made the offer.

 

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ii.	Fair value adjustments

The unaudited condensed consolidated pro forma financial statements have been prepared using Cadbury’s publicly available financial statements and disclosures, without the benefit of inspection of Cadbury’s books and records. Therefore, except as noted below, the carrying value of assets and liabilities in Cadbury’s financial statements are considered to be a proxy for fair value of those assets and liabilities. In addition, certain pro forma adjustments, such as recording fair value of assets and liabilities and adjustments for consistency of accounting policy, except for the adjustments to reflect Cadbury under U.S. GAAP, are not reflected in these unaudited pro forma consolidated financial statements.

For purposes of the pro forma analysis, the intangible assets of Cadbury have been increased $3,470 million to a total value of $5,000 million to reflect our preliminary estimate of the fair value of intangible assets, including trade names and customer lists. A deferred tax liability of $1,042 million was recorded in connection with this increase. No other adjustment was made to the assets and liabilities of Cadbury to reflect their fair value. Goodwill was increased $7,363 million to reflect the total excess of the purchase consideration over the fair value of the assets acquired of $13,485 million. Following completion of the Cadbury acquisition, Kraft Foods anticipates that the acquisition cost allocation may differ materially from the preliminary assessment outlined above. Any changes to the initial estimates of the fair value of the assets and liabilities will be allocated to residual goodwill.

At this time there is insufficient information as to the specific nature, age, condition and location of Cadbury’s property, plant and equipment to make a reasonable estimation of fair value or the corresponding adjustment to depreciation and amortization. For each $100 million fair value adjustment to property, plant and equipment, assuming a weighted-average useful life of 10 years, depreciation expense would change by approximately $10 million. Once Kraft Foods has complete information as to the specifics of Cadbury’s intangible assets, the estimated values assigned to the intangible assets and/or the associated estimated weighted-average useful life of the intangible assets will likely be different than that reflected in these unaudited pro forma condensed combined financial statements and the differences could be material.

 

(b)	Transaction Costs

We have estimated that total Cadbury acquisition related costs will be $390 million. These costs have been accrued as a current liability, net of a $70 million tax benefit. Because we are required to expense these costs as they are incurred, we have charged them to retained earnings as of June 30, 2009. No adjustment has been made to either income statement for these costs as they are non-recurring.

 

(c)	Interest Expense

An adjustment to record pro forma interest expense of $91 million was made for the six months ended June 30, 2009, and $181 million for the year ended December 31, 2008. The interest charges relate to the $6,616 million drawn on the bridge loan as if such amount was borrowed at January 1, 2008 and outstanding at June 30, 2009. The interest rate on this loan is one-month LIBOR (0.25% at December 1, 2009) plus 250 basis points. A change in this rate of one-eighth of a percent would cause an $8 million change in annual interest expense. These interest charges will have a continuing impact on the consolidated results until borrowings under this facility are repaid.

 

(d)	Amortization Expense

An adjustment to record estimated amortization of $9 million was made for the six months ended June 30, 2009, and $18 million for the year ended December 31, 2008. This adjustment was based on the assumption that $360 million of the recorded intangible assets would be definite lived. The estimated useful life of these intangible assets is 20 years.

 

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(e)	Tax Provision Benefit

The estimated tax provision benefits of the above adjustments are $30 million for the six months ended June 30, 2009, and $60 million for the year ended December 31, 2008. The tax rate is based on the estimated blended tax rate based on the tax jurisdictions in which Cadbury operates.

 

(f)	Elimination of Cadbury Shareholders’ Equity

An adjustment to eliminate Cadbury’s Additional Paid in Capital of $324 million, Retained Earnings of $6,166 million and Accumulated Other Comprehensive Income of $469 million was recorded in the pro forma consolidated balance sheet at June 30, 2009.

 

(g)	Earnings per Common Share

Pro forma earnings per common share for the year ended December 31, 2008 and the six months ended June 30, 2009, have been calculated based on the estimated weighted average number of common shares outstanding on a pro forma basis, as described below. The pro forma weighted average number of common shares outstanding for the year ended December 31, 2008 and the six months ended June 30, 2009, have been calculated as if the acquisition shares had been issued and outstanding on January 1, 2008.

The following table sets forth the computation of basic and diluted earnings per share for the six month period ended June 30, 2009 and the year ended December 31, 2008:

 

		For the Six Months Ended June 30, 2009						For the Year Ended December 31, 2008
		Historical Kraft Foods			Pro Forma Combined			Historical Kraft Foods			Pro Forma Combined
		(in millions, except per share data)
Net earnings attributable to Kraft Foods from continuing operations		$	1,487		$	1,495		$	1,839		$	2,294
Weighted-average shares for basic EPS			1,476			1,842			1,505			1,871
Plus incremental shares from assumed conversions of stock options and long-term incentive plan shares			8			8			10			10
Weighted-average shares for diluted EPS			1,484			1,850			1,515			1,881
Basic earnings per share attributable to Kraft Foods from continuing operations		$	1.01		$	0.81		$	1.22		$	1.23
Diluted earnings per share attributable to Kraft Foods from continuing operations		$	1.00		$	0.81		$	1.21		$	1.22

 

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SUMMARY OF SIGNIFICANT DIFFERENCES BETWEEN IFRS AND U.S. GAAP

The financial information of Cadbury included in this Proxy Statement has been prepared and presented in accordance with IFRS. Certain differences exist between IFRS and U.S. GAAP which might be material to the financial information included in this Proxy Statement.

The principal relevant differences between U.S. GAAP and IFRS that we believe would be material in the preparation of Cadbury’s financial statements are described below. Because we did not have any access to non-public business or detailed financial information of Cadbury, we cannot be sure that the differences described below are complete or would in fact be the accounting principles creating the most significant differences between financial information of Cadbury prepared under IFRS and U.S. GAAP. The following summary does not include all differences that exist between IFRS and U.S. GAAP and is not intended to provide a comprehensive listing of all such differences specifically related to us, Cadbury or the industry in which we and Cadbury operate.

The differences described below reflect only those differences in accounting policies in force at the time of the preparation of the historical financial information of Cadbury. There has been no attempt to identify future differences between IFRS and U.S. GAAP as the result of prescribed changes in accounting standards, transactions or events that may occur in the future. The organizations that promulgate IFRS and U.S. GAAP have significant projects ongoing that could have a significant impact on future comparisons such as this one between IFRS and U.S. GAAP. Future developments or changes in either IFRS or U.S. GAAP may give rise to additional differences between IFRS and U.S. GAAP which could have a significant impact on us or the combined company.

Consolidated Financial Statements

Both IFRS and U.S. GAAP generally require the preparation of consolidated financial statements by a parent entity that includes all subsidiaries. For purposes of consolidation, the definition of a subsidiary is an important distinction between the two frameworks. IFRS focuses solely on the parent’s ability to govern the financial and operating policies of a subsidiary to obtain benefits in determining whether that subsidiary should be consolidated. Under U.S. GAAP the need for consolidation is evaluated under both a traditional voting control model and a variable interest model. Consolidated variable interests (“VIE”) are those for which a parent does not have a controlling voting interest, but does absorb the majority of the VIE’ s expected losses or returns.

Business Combinations and Goodwill

Upon adoption of IFRS, entities were permitted to retain their historical GAAP accounting treatment for business combinations. Under U.K. GAAP, Cadbury wrote off goodwill acquired prior to 1998 against shareholder’s equity at the time of acquisition. Goodwill resulting from business combinations between 1998 and 2003 was capitalized, with subsequent measurement based on the attributes of the acquired business. Any historical differences between previous GAAP used and U.S. GAAP would continue to exist if this election is applied. Since the adoption of IFRS, both U.S. GAAP and IFRS require that goodwill not be amortized, and that it be tested on an annual basis for potential impairment.

Also, under IFRS, where the change of interest in an entity results in an entity previously accounted for as an associated undertaking to being a subsidiary, any fair value uplift related to the percentage ownership previously held is recorded in the financial statements as an increase to the related assets and by the creation of a revaluation reserve, which is amortized into retained earnings over the period that the related depreciation is charged to the income statement. Until 2009, under U.S. GAAP, only the percentage of assets and liabilities acquired in each step of an acquisition are fair valued; no revaluation of assets and liabilities previously acquired is made.

 

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Intangible Assets

IFRS permits capitalization of certain internal development costs whereas U.S. GAAP requires all research and development costs to be expensed as incurred. Measurement of acquired intangibles is similar under IFRS and U.S. GAAP, except that IFRS permits reversal of intangible impairment losses under certain conditions whereas reversal is prohibited under U.S. GAAP.

Property, Plant and Equipment

Under IFRS, the use of historical cost, or revalued amounts is permitted. Frequent valuations of entire classes of assets are required when the revaluation option is chosen. Under U.S. GAAP, revaluation is not permitted, except for downward revaluation when the asset is impaired.

Under both IFRS and U.S. GAAP, an impairment loss is recognized on long-lived assets held for use when events and circumstances indicate the asset might be impaired. Under IFRS, an impairment charge is recorded to reduce the carrying value to fair value, while under U.S. GAAP, such impairment charge is recorded only if the estimated undiscounted cash flows to be generated by the asset are less than carrying value. Under IFRS, reversals of impairment losses are recognized under certain conditions, while U.S. GAAP does not permit the reversal of an impairment loss.

Also, on transition to IFRS, Cadbury exercised the exemption available under IFRS to treat the depreciated revalued cost of certain properties as the deemed cost. The revaluation of these properties under U.K. GAAP was not permitted under U.S. GAAP and remains a difference between IFRS and U.S. GAAP.

Capitalization of Interest

Under IFRS, Cadbury elected to not capitalize interest and expenses interest charges to the profit and loss account in the year in which they are incurred. Under U.S. GAAP, interest charges on funds invested in the construction of qualifying assets during the time required to prepare them for their intended use are capitalized and amortized over the life of the respective assets.

Accounting for Leases

Under IFRS, profit or loss arising on the sale and operating leaseback of property, plant and equipment may generally be recognized in the period in which the sale takes place. Under U.S. GAAP, a sale and leaseback of property, plant and equipment must first qualify for such accounting and then profit or loss appraised is recognized depending upon the amount of use that the seller will retain of the property. Where the seller will retain more than a minor part but less than substantially all of the use of the property, any profit up to the present value of the minimum lease payments for an operating lease is deferred and recognized over the lease and any amount in excess of the present value of the minimum lease payments shall be recognized at the date of sale.

Deferred Tax

Both frameworks follow the principle that a deferred tax liability or asset should be recognized for all temporary differences. IFRS requires entities to measure deferred tax balances on the basis of tax rates that are expected to apply in the period they are settled (realized), which are enacted or substantively enacted by the balance sheet date. Under U.S. GAAP, deferred taxation is provided on all temporary differences between the tax and book bases of assets and liabilities using enacted tax rate at the reporting date; the effects of future changes in tax laws or rates are not anticipated.

Under IFRS, deferred tax is recognized on intra-group transfers of assets and liabilities, including transfers of intellectual property assets. Under U.S. GAAP, the recognition of deferred tax on such transactions is not permitted.

 

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Uncertain Tax Positions

U.S. GAAP requires entities to utilize a two-step process to recognize and measure uncertain tax positions. Tax benefits arising from uncertain tax positions can be recognized only if it is more likely than not that the position is sustainable on its technical merits. IFRS does not specifically address the accounting for uncertain tax positions.

Employee Share Compensation

Under IFRS, all of Cadbury’s employee share awards are considered equity settled and hence Cadbury did not recognize a liability within the balance sheet for such arrangements. The income statement charge recorded under IFRS is based upon the grant date fair value of the share awards. Under U.S. GAAP, certain plans which contain inflation-indexed earnings growth performance conditions would be accounted for under the liability method, which would require a liability to be recorded on the balance sheet over the vesting period. In addition, the fair value of each liability-classified award must be re-measured at each reporting date until vesting, whereas for equity-settled employee share awards the charge is calculated with reference to the grant date fair value.

For U.S. GAAP, deferred tax assets for share awards are recorded based on the recorded compensation expense. Under IFRS, deferred tax assets are adjusted to recognize the movement in the intrinsic value of the share awards.

Employee Pension Benefits

Both frameworks require the cost of providing retirement benefits to be recognized on a systematic and rational basis over the period during which employees provide services to the entity. However, with respect to defined benefit plans, IFRS methodology generally provides for more immediate recognition of gains and losses arising from changes in actuarial measurement of obligations, as well as from changes in the market value of plan assets.

Upon the adoption of IFRS, Cadbury elected to recognize all cumulative actuarial gains and losses through equity at the date of transition. U.S. GAAP does not permit this option to recognize all cumulative actuarial gains or losses, therefore, at the date of transition and in future periods, this difference in timing causes differences between IFRS and U.S. GAAP. Under IFRS, all future actuarial gains and losses are also recognized in full outside the income statement in retained earnings and presented in the statement of recognized income and expense. U.S. GAAP does not permit recognition of all actuarial gains and losses in a statement other than the primary income statement.

Exit Activities

Under IFRS, liabilities for employee severance, plant closure and other exit costs may generally be recognized when an entity has formally committed to a plan. U.S. GAAP prohibits the recognition of a liability based solely on an entity’s commitment to a plan. Recognition of a provision for one-time termination benefits requires communication of the details of the plan to the affected employees and most other categories of exit costs are recognized as incurred.

 

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WHERE YOU CAN FIND MORE INFORMATION

We file annual, quarterly and current reports, proxy statements and other information with the SEC, and Cadbury files annual and special reports and other information with the SEC. You may read and copy any of this information filed with the SEC at the SEC’s public reference room:

Public Reference Room

100 F Street NE

Room 1024

Washington, D.C. 20549

For information regarding the operation of the Public Reference Room, you may call the SEC at 1-800-SEC-0330. These filings made with the SEC are also available to the public through the web site maintained by the SEC at www.sec.gov or from commercial document retrieval services. Our filings are also available on our web site at www.kraftfoodscompany.com. In addition, our common stock is listed on the NYSE and similar information concerning us can be inspected and copied at the offices of the New York Stock Exchange, Inc., 20 Broad Street, New York, New York 10005. You are encouraged to read the materials that we file with the SEC, which disclose important information about us. This information includes any filing we have made with the SEC under Section 13(a), 13(c), 14 or 15(d) of the Exchange Act.

On December 4, 2009, we filed a registration statement on Form S-4 to register with the SEC the shares of our common stock to be issued to the holders of Cadbury ordinary shares and Cadbury ADSs in connection with our proposed Cadbury acquisition. We may also file amendments to that registration statement. In addition, on December 4, 2009, we filed with the SEC a tender offer statement on Schedule TO under the Exchange Act, together with exhibits, to furnish certain information about the offer. We may also file amendments to the Schedule TO. You should read these documents as they contain important information. If the form of or procedures for the Cadbury acquisition change, the Form S-4 and Schedule TO may not be required. You may obtain copies of the Form S-4 and Schedule TO (and any amendments to those documents) free of charge from the SEC at the SEC’s web site at www.sec.gov, at our web site at www.kraftfoodscompany.com or by directing a request as follows:

 

By mail:		By fax:		By e-mail:
Kraft Foods Inc. c/o Georgeson Inc. Attention: Christopher Cinek 199 Water Street, 26th Floor New York, NY 10038		(877) 260-0406 (toll-free within the U.S.) (212) 440-9009 (from outside the U.S.) Attention: Christopher Cinek		ccinek@georgeson.com

 

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INCORPORATION BY REFERENCE

The SEC allows us to incorporate information into this Proxy Statement “by reference,” which means that we can disclose important information to you by referring you to another document filed separately with the SEC. The information incorporated by reference is deemed to be part of this Proxy Statement, except for any information superseded by information contained directly in this Proxy Statement. This Proxy Statement incorporates by reference the documents set forth below that Kraft Foods and Cadbury have previously filed or furnished with the SEC. These documents contain important information about Kraft Foods and Cadbury and their financial condition, business and results.

 

Kraft Foods Filings (File No. 001-16483)		Period
Annual Report on Form 10-K		Fiscal year ended December 31, 2008, as filed on February 27, 2009
The description of our common stock contained in Kraft Foods’ Registration Statement on Form 8-A, filed with the SEC on May 9, 2001, including any amendment or report filed with the SEC for the purpose of updating such description.
Quarterly Reports on Form 10-Q		Fiscal quarter ended March 31, 2009, as filed on May 5, 2009, fiscal quarter ended June 30, 2009, as filed on August 5, 2009 and fiscal quarter ended September 30, 2009, as filed on November 3, 2009
Current Reports on Form 8-K		Filed on January 15, 2009, January 20, 2009, February 2, 2009, February 26, 2009, March 4, 2009, March 18, 2009, March 26, 2009 (Item 8.01 information only), May 7, 2009, May 21, 2009, June 22, 2009, July 31, 2009, September 8, 2009 (as to Item 5.02), September 8, 2009 (Item 8.01 information only), October 6, 2009, November 3, 2009 (as to Items 8.01 and 9.01), November 9, 2009 (as to Items 1.01 and 2.03), November 9, 2009 (Item 8.01 information only), December 1, 2009 and December 4, 2009 (Item 8.01 information only)
Proxy Statement on Schedule 14A		Filed on March 31, 2009

 

Cadbury Filings (File No. 333-06444)		Period
Annual Report on Form 20-F		Fiscal year ended December 31, 2008, as filed on March 31, 2009
Report on Form 6-K		Furnished on July 29, 2009

We also hereby incorporate by reference any additional documents that we or Cadbury may file with the SEC pursuant to Section 13(a), 13(c), 14 or 15(d) of the Exchange Act from the date of this Proxy Statement until the Special Meeting. These include, but are not limited to, periodic reports, such as annual reports on Forms 10-K or 20-F, quarterly reports on Form 10-Q and current reports on Form 8-K, as well as proxy statements; provided, however, that we are not incorporating any information furnished under either Item 2.02 or Item 7.01 of any current report on Form 8-K. We will also incorporate by reference any additional Annual Reports on Form 20-F and any amendments thereto that Cadbury may file with the SEC from the date of this Proxy Statement to the Special Meeting.

 

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You may obtain any of these documents from the SEC at the SEC’s Internet web site at www.sec.gov or by requesting any of such documents from us using one of these methods by no later than January 25, 2010 to receive them before the Special Meeting:

 

By mail:		By fax:		By e-mail:
Kraft Foods Inc. c/o Georgeson Inc. Attention: Christopher Cinek 199 Water Street, 26th Floor New York, NY 10038		(877) 260-0406 (toll-free within the U.S.) (212) 440-9009 (from outside the U.S.) Attention: Christopher Cinek		ccinek@georgeson.com

YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED OR INCORPORATED BY REFERENCE IN THIS PROXY STATEMENT, OR TO WHICH WE HAVE REFERRED YOU, IN MAKING YOUR DECISION WHETHER TO VOTE IN FAVOR OF THE SHARE ISSUANCE PROPOSAL AND THE ADJOURNMENT PROPOSAL. WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE OUR SHAREHOLDERS WITH INFORMATION THAT DIFFERS FROM THAT CONTAINED IN THIS PROXY STATEMENT. THIS PROXY STATEMENT IS DATED DECEMBER 18, 2009. YOU SHOULD NOT ASSUME THAT THE INFORMATION CONTAINED IN THIS PROXY STATEMENT IS ACCURATE AS OF ANY DATE OTHER THAN THAT DATE, UNLESS WE OTHERWISE NOTE IN THIS PROXY STATEMENT.

 

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SHAREHOLDER PROPOSALS FOR THE 2010 ANNUAL MEETING OF SHAREHOLDERS

Our By-Laws provide that in order for a shareholder to nominate a candidate for election as a director at an annual meeting of shareholders or to propose business for consideration at that meeting, the shareholder must deliver written notice containing the information required by our By-Laws to our Corporate Secretary, not later than the 120th day, and not earlier than the 150th day, before the first anniversary of the preceding year’s annual meeting. Accordingly, a shareholder must provide notice of a nomination or proposal to our Corporate Secretary on or after December 21, 2009 and on or before January 20, 2010 to be considered at the 2010 Annual Meeting.

Under the SEC’s rules, if a shareholder had wished to submit a proposal for possible inclusion in our 2010 proxy statement pursuant to Rule 14a-8 of the Exchange Act, we would have had to receive it on or before December 1, 2009.

All proposals must be in writing and should be mailed to our Corporate Secretary at Kraft Foods Inc., Three Lakes Drive, Northfield, Illinois 60093. A copy of our By-Laws may be obtained from our Corporate Secretary by written request to the same address, and is also available on our web site at www.kraftfoodscompany.com/Investor/corporate-governance/index.aspx.

OTHER MATTERS

Our Board and management know of no matters other than those listed in the attached notice of the Special Meeting that are likely to be brought before the Special Meeting. However, if any other matters should properly come before the Special Meeting or any adjournment or postponement thereof, the persons named in the proxy will vote all proxies given to them in accordance with the recommendation of the Board.

The directors of Kraft Foods accept responsibility for the information contained in this Proxy Statement, except that the only responsibility accepted by them in respect of the information contained in this Proxy Statement relating to Cadbury, which has been compiled from published sources, is to ensure that such information is correctly and fairly reproduced and presented. To the best of the knowledge and belief of the directors of Kraft Foods (who have taken all reasonable care to ensure that such is the case), the information contained in this Proxy Statement for which they accept responsibility is in accordance with the facts and does not omit anything likely to affect the import of that information.

Each shareholder is urged to return a proxy as soon as possible.

By Order of the Board of Directors

Carol J. Ward

Vice President and Corporate Secretary

December 18, 2009

 

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MAP AND DIRECTIONS TO HILTON CHICAGO/NORTHBROOK HOTEL

Special Meeting of Shareholders

Hilton Chicago/Northbrook Hotel

2855 N. Milwaukee Avenue

Northbrook, IL 60062

From Downtown Chicago:

Take 90/94 West to O’Hare/Rockford to 294 North/Milwaukee, WI. Exit at Willow Road. Travel west on Willow Road to Milwaukee Ave. and travel south on Milwaukee Ave. for a ½ mile. The hotel is on the left.

From the West:

Take 90 East to 294 North. Exit at Willow Road. Travel west on Willow Road to Milwaukee Ave. and travel south on Milwaukee Ave. for a ½ mile. The hotel is on the left.

From the North:

Take 94 East to 294 South. Exit at Willow Road. Travel west on Willow Road to Milwaukee Ave. and travel south on Milwaukee Ave. for a ½ mile. The hotel is on the left.

From the South:

Take 294 North. Exit at Willow Road. Travel west on Willow Road to Milwaukee Ave. and travel south on Milwaukee Ave. for a ½ mile. The hotel is on the left.

Located at the intersection of Milwaukee Ave. (Route 21) and Winkelman Road, the hotel is south of Willow Road, north of Lake Avenue and just west of the Tri-State Tollway (294).

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KRAFT FOODS INC.

SPECIAL MEETING OF SHAREHOLDERS

February 1, 2010

9:00 a.m. CST

 

 

 

 

 

		Kraft Foods Inc. Three Lakes Drive Northfield, Illinois 60093		proxy

This proxy is solicited by the Board of Directors for use at the Special Meeting on February 1, 2010.

The shares of stock you hold in your account or in a dividend reinvestment account will be voted as you specify on the reverse side.

If no choice is specified, the proxy will be voted “FOR” Items 1 and 2.

By signing the proxy, you revoke all prior proxies and appoint Carol J. Ward and Irma Villarreal and each of them with full power of substitution, to vote your shares on the matters shown on the reverse side and any other matters which may come before the Special Meeting and any postponements or adjournments thereof.

In addition, if you are a current or former Kraft Foods employee and have investments in the Kraft Foods Stock Fund(s) of the Kraft Foods Inc. Thrift/TIP 401(k) Plan(s) and/or the Kraft Foods Canada Optional Pension Plan(s)/ Employee Savings Plan on December 14, 2009, you are directing the plan(s) trustee(s) how to vote the shares allocated to your account(s). If your voting instructions are not received by 11:59 p.m. CST on January 27, 2010, as described in the Proxy Statement, the trustee(s) will vote the shares allocated to your Kraft Foods Stock Fund account(s) in the same proportion as the respective plan shares for which voting instructions have been received, unless contrary to the Employee Retirement Income Security Act of 1974 (ERISA).

See reverse for voting instructions.

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		COMPANY #

		Vote by Internet, Telephone or Mail 24 Hours a Day, 7 Days a Week   Your Internet or Telephone vote authorizes the named proxies to vote your shares in the same manner as if you marked, signed and returned your proxy card.      INTERNET – www.eproxy.com/kft   Use the Internet to vote your proxy until 11:59 p.m. (CST) on January 31, 2010.      TELEPHONE – 1-800-560-1965   Use a touch-tone telephone to vote your proxy until 11:59 p.m. (CST) on January 31, 2010.       MAIL – Mark, sign and date your proxy card and return it in the postage-paid envelope provided.   If you vote your proxy by Internet or by Telephone, you do NOT need to mail back your Proxy Card.

TO VOTE BY MAIL AS THE BOARD OF DIRECTORS RECOMMENDS ON ALL ITEMS BELOW, SIMPLY SIGN, DATE, AND RETURN THIS PROXY CARD.

 

		ò		Please detach here		ò

 

 

		The Board of Directors Recommends a Vote FOR Items 1 and 2.

Item 1.		A proposal to approve issuing up to 370 million shares of Kraft Foods Inc. Class A common stock in connection with our proposed acquisition of Cadbury plc, including any issuance of shares of Kraft Foods Class A common stock to finance the proposed acquisition.		¨    For		¨    Against		¨    Abstain
Item 2.		A proposal to approve any adjournment of the Special Meeting, including, if necessary, to solicit additional proxies in favor of Item 1 if there are not sufficient votes for Item 1.		¨    For		¨    Against		¨    Abstain

THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED AS DIRECTED OR, IF NO DIRECTION IS GIVEN, WILL BE VOTED FOR EACH PROPOSAL.

 

¨       I will attend the Special Meeting.
¨       I will bring a guest to the Special Meeting (one guest allowed).
Address Change? Mark Box     ¨    Indicate changes below:		Date
		Signature(s) in Box   Please sign exactly as your name(s) appears on Proxy. If held in joint tenancy, all persons should sign. Trustees, administrators, etc., should include title and authority. Corporations should provide full name of corporation and title of authorized officer signing the Proxy.

 

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NOT FOR RELEASE, PUBLICATION OR DISTRIBUTION, IN WHOLE OR IN PART, IN, INTO OR FROM JAPAN OR ANY OTHER JURISDICTION WHERE TO DO SO WOULD CONSTITUTE A VIOLATION OF THE RELEVANT LAWS OF THAT JURISDICTION

For Immediate Release

18 December 2009

Kraft Foods Inc. Filing of Definitive Proxy Statement

Kraft Foods Inc. (“Kraft Foods”) announces that it has today filed a Definitive Proxy Statement with the U.S. Securities and Exchange Commission (the “SEC”) with respect to its shareholder vote on all proposals required under certain rules of the New York Stock Exchange to approve the issuance of Kraft Foods shares in connection with its offer for Cadbury plc (the “Offer”). The special meeting will be held on 1 February 2010 at the Hilton Chicago/Northbrook Hotel in Northbrook, Illinois. Kraft Foods shareholders of record at the close of business CST on 14 December 2009 are entitled to vote at the special meeting or any adjournments or postponements of the special meeting. Kraft Foods is mailing the Definitive Proxy Statement to shareholders beginning on or about 21 December 2009.

The Definitive Proxy Statement can be viewed at phx.corporate-ir.net/phoenix.zhtml?c=129070&p=irol-secProxy.

Further information

This announcement will be available on Kraft Foods’ website at www.transactioninfo.com/kraftfoods by no later than 12 noon (London time) on 21 December 2009.

Rule 14a-12 Legend

Kraft Foods and its directors and officers may be deemed to be participants in the solicitation of proxies from Kraft Foods shareholders in connection with the issuance of Kraft Foods shares. Information about the directors and executive officers of Kraft Foods and their ownership of Kraft Foods shares is set forth in the definitive proxy statement filed by Kraft Foods with the SEC on 18 December 2009.

Kraft Foods has filed the definitive proxy statement described in this announcement with the SEC and will mail the definitive proxy statement and other relevant documents to Kraft Foods shareholders. The definitive proxy statement, and any other documents filed by Kraft Foods with the SEC, may be obtained free of charge at the SEC’s website at www.sec.gov or at Kraft Foods’ website at www.kraftfoodscompany.com. Investors should read the definitive proxy statement carefully, before making any voting decision because it contains important information.

Forward-looking statements

This document contains forward-looking statements regarding the Offer. Such statements include statements about the benefits of the proposed combination and other such items, based on our plans, estimates and projections. These forward-looking statements are subject to a number of risks and uncertainties, many of which are beyond the control of Kraft Foods, that could cause Kraft Foods’ actual results to differ materially

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from those indicated in any such forward-looking statements. Such factors include, but are not limited to, failure to obtain necessary regulatory approvals or required financing or to satisfy any of the other conditions to the proposed acquisition, and the risk factors set forth in our filings with the SEC, including our registration statement on Form S-4 filed in connection with the Offer, our most recently filed Annual Report on Form 10-K and subsequent reports on Forms 10-Q and 8-K. We disclaim and do not undertake any obligation to update or revise any forward-looking statement in this document, except as required by applicable law or regulation.

Additional US-related information

This document is provided for informational purposes only and is neither an offer to purchase nor a solicitation of an offer to sell shares of Cadbury plc or Kraft Foods. Kraft Foods has filed a registration statement and tender offer documents with the SEC in connection with the proposed combination. United States and Canadian residents who hold Cadbury shares and holders of Cadbury ADSs, wherever located, should read those filings, and any other filings made by Kraft Foods with the SEC in connection with the proposed combination, as they contain important information. Those documents, as well as Kraft Foods’ other public filings with the SEC may be obtained without charge at the SEC’s web site at www.sec.gov and at Kraft Foods’ web site at www.kraftfoodscompany.com.

 

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