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, sources familiar with the matter said on Monday.

Cadbury had steadfastly rejected Kraft's 10.5 billion pound ($17.1 billion) 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.

When asked why the two companies came to the table after nearly five months, one source told Reuters: Both parties felt that they were potentially able to realize their most important needs through negotiation, on price and governance.

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

Officials from Kraft and Cadbury declined to comment.

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.

Kraft Chief Executive Irene 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.

Cadbury had said it sought to remain independent so long as Kraft's offer undervalued its businesses. It had also encouraged talks with potential rival bidders, including Hershey Co , which 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. Hershey officials declined comment on Monday on news of a possible friendly deal between Kraft and Cadbury.

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

Cadbury United kingdom