Chocolate makers Hershey Co and Ferrero SpA are considering a joint bid for Cadbury Plc that could help the British confectioner fend off a hostile takeover by Kraft Foods Inc

A source familiar with the talks between U.S.-based Hershey and Italy's Ferrero said on Tuesday that the discussions between the two sides were very preliminary. Very early in the process.

Hershey executives have been more aggressive about pursuing a deal, but financial details have not been discussed and no offer has been made, the Wall Street Journal reported on Tuesday.

The talks are the strongest sign yet of a possible rival bid to Kraft's $16.7 billion offer, which Cadbury rejected and said was derisory.

Another person familiar with the situation said that Cadbury had not been contacted by Ferrero but would consider any attractive offer. Analysts and traders said there was a possibility that such an alliance might emerge and pose a viable defense against Kraft.

Cadbury has heard nothing from Ferrero or people acting for it. Cadbury is not up for sale, but the company would give proper consideration to any offer that valued it properly and would be of interest to shareholders, the person said.

Ferrero and Cadbury both declined comment. Hershey and Hershey Trust officials could not immediately be reached.

Although Cadbury's assets are very attractive, it doesn't appear that either Ferrero or Hershey is in the financial position of taking on Cadbury all by themselves, said Erin Swanson, an equity analyst with Morningstar.

Hershey shares slipped 6 cents to $38.35 in extended trading on Tuesday following news of its talks with Ferrero. Cadbury shares had earlier closed up 0.8 percent at 788 pence on Tuesday, while Kraft gained 1 cent to $27.64.

VIABLE ALTERNATIVE?

Earlier on Tuesday, Italian business daily Il Sole 24 Ore said family-owned Ferrero, which makes Nutella chocolate spread and Ferrero Rocher chocolates, could join financial investors and private equity players considered friendly to Cadbury for a possible alliance.

We believe that if this scenario were proposed as a potential defense measure by Cadbury, the potential value the market might be prepared to award it would not be materially different to that of a revised Kraft offer, at 820 pence per share, Nomura analyst Alex Smith said of a Cadbury-Ferrero combination.

Kraft's cash and stock offer for Cadbury is closer to 726 pence per share.

Another advantage for Cadbury shareholders is that they would continue to hold shares in a high-growth confectionery group -- with a potentially retained UK listing -- rather than being paid around 50 percent equity in a low-growth US-listed conglomerate, Smith added.

Ferrero, which has annual sales of 6.2 billion euros ($9.3 billion), 18 factories and over 21,600 employees worldwide is also known for its Kinder chocolates and Tic-Tac candy.

Cadbury is the world's second-largest confectionery company after Mars-Wrigley, making brands such as Dairy Milk chocolate and Trident gum. It had full-year revenues of 5.4 billion pounds ($9.1 billion) in 2008.

Ferrero was founded in 1946 by Pietro Ferrero in Italy's northwestern province of Piedmont. He invented Gianduja cream using local hazelnuts as an alternative to chocolate which was in short supply after World War II.

His son Michele, named by Forbes magazine earlier this month as the richest man in Italy, took control in 1957 and the company is now run by his sons, Pietro and Giovanni, who are chief executives and live in Belgium.

(Reporting by Jessica Hall and Jo Winterbottom; Additional reporting by Nigel Tutt, Victoria Howley, Brad Dorfman and David Jones; Editing by Michele Gershberg, Bernard Orr)

($1 = 0.5941 pound = 0.6685 euro)

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