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Updated from 2:23 a.m. EST

VEVEY, Switzerland (

TheStreet

) --

Nestle

( KFT) agreed to acquire

Kraft Foods'

( CBY) frozen pizza business in the U.S. and Canada for $3.7 billion in cash, and Kraft said it would use the proceeds to offer a partial cash alternative in its offer for

Cadbury

( CBY).

Kraft said Cadbury shareholders who elect to receive the cash alternative would get 60 pence per Cadbury share or 240 pence per Cadbury American depositary share, instead of stock. Kraft plans to announce the terms of this partial cash alternative on or before Jan. 19, the last day it could amend its offer for Cadbury.

Kraft said Tuesday it was doing this "because of the desire expressed by some Cadbury securityholders to have a greater proportion of the offer in cash."

Kraft also said it was extending the acceptance period for Cadbury shareholders to tender their shares to Kraft's $16 billion offer from Tuesday to Feb. 2.

Cadbury has yet to comment on the latest Kraft offer.

Reports over the weekend said Kraft was preparing to

increase its hostile takeover bid

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of more than 10 billion pounds ($15.9 billion) for Cadbury, the British confectionery maker, which has repeatedly rebuffed the Kraft offer.

Kraft is selling its DiGiorno, Tombstone brands and the California Pizza Kitchen trademark license to Nestle, which called the acquisition a "natural fit." The deal pairs Kraft's brands with Nestle brands like Stouffer's, Lean Cuisine and Hot Pockets.

The transaction is subject to U.S. and Canadian regulatory approval and is expected to be completed this year.

Nestle said its frozen pizza business would have total sales of about 3 billion Swiss francs ($2.92 billion). The Kraft businesses being acquired had sales of about $2.1 billion in 2009. Kraft put the number closer to $1.6 billion.

Separately, Nestle said on its Web site it "confirms that it does not intend to make, or participate in, a formal offer for Cadbury."

Nestle's

sale

Monday of its 52% stake in

Alcon

( ACL) to

Novartis

(NVS) - Get Novartis AG Report

for about $28 billion in cash fueled speculation it could use the proceeds to make a run at

Cadbury

( CBY), which is fending off a hostile bid from Kraft.

-- Reported by Joseph Woelfel in New York.

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