U.S.-based Kraft Foods Inc and Britain's Cadbury Plc are holding talks about a potential friendly deal to create the world's largest confectionery group for up to 11.7 billion pounds ($19 billion), sources familiar with the matter said on Monday.

Cadbury had steadfastly rejected Kraft's previous 10.5 billion pound hostile takeover bid since a brief conversation between the two sides in late August. Kraft faces a UK Takeover Panel deadline on Tuesday to raise its bid high enough to entice a majority of Cadbury shareholders.

Kraft Chief Executive Irene Rosenfeld is discussing a potential agreement with Cadbury Chairman Roger Carr and Cadbury CEO Todd Stitzer late into the night in central London, sources familiar with the situation told Reuters.

One source said the two sides were discussing a deal valued at 840 pence to 850 pence a share for Cadbury, compared to Kraft's current offer of 769p a share, and that an agreement could be announced as early as Tuesday.

Talks are at an advanced stage, and it will be very difficult for Cadbury not to recommend a deal close to 850 pence, said a second source.

Rosenfeld had gone door-to-door in London to visit Cadbury investors late last week, with many shareholders saying she mostly listened to their arguments for a higher price. Direct talks with Cadbury began after she took stock of their comments, sources said.

Kraft had been expected to raise its bid by the deadline and many Cadbury investors said they would not contemplate an offer below 800p to 850p per share. Earlier on Monday, major Cadbury shareholder Standard Life said Kraft needed to bid over 900p per share to get its support.

AN END TO INDEPENDENCE?

Cadbury, the maker of Dairy Milk chocolate and Trident chewing gum, had said it sought to remain on its own as long as Kraft's offer undervalued its businesses.

A deal with the U.S. food group, known for its Oreo cookie and Velveeta cheese brands, would mark the end of independence for a British institution built 186 years ago when John Cadbury opened a shop in Birmingham selling tea and cocoa.

I identify them with plastic cheese on hamburgers, said Felicity Loudon, a descendant of Cadbury's founding family, when asked about Kraft in November.

Unite, Britain's largest labor union, has also opposed a takeover by Kraft, saying the U.S. company would need to lay off tens of thousands of workers to achieve its savings targets in a deal.

Cadbury's leadership had also encouraged talks with potential rival bidders, particularly Hershey Co , a partner in selling Cadbury's brands in the United States. But Hershey has struggled with the notion of buying a company more than twice its size.

Hershey had been preparing a bid for Cadbury to top Kraft, but had yet to make a final decision on submitting an offer. A source familiar with the matter said on Monday that Hershey was waiting to see details of Kraft's final bid and that the company was surprised by news of a possible friendly deal.

Hershey officials declined comment.

(Reporting by Brad Dorfman and David Jones; Additional reporting by Jessica Hall; Writing by Michele Gershberg, editing by Martin Golan)

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