NEW YORK (Bloomberg) - Billionaire investor William Ackman bought a $950 million stake in Kraft Foods Inc. and urged its CEO Irene Rosenfeld to limit the amount of stock she uses to bid for Cadbury plc.

Ackman's Pershing Square Capital Management LP bought at least 32 million shares in Kraft, or two percent of the company, and plans to purchase more, Ackman said in an interview yesterday. Pershing's stake in Kraft is now the firm's biggest holding.

Pershing thinks "very highly of Irene Rosenfeld and her business plan", and believes Kraft's £11 billion ($17.9 billion) stock-and-cash bid for Cadbury makes "tremendous sense", Ackman said. Kraft risks diminishing the deal's merits by issuing too much stock to pay for it, he said, echoing a warning by investor Warren Buffett on January 5.

"The more Kraft stock they issue, the less interesting this deal is," Ackman said. "Fortunately, the seller also prefers cash." Ackman said Kraft stock is "extremely undervalued."

The Pershing stake will be disclosed in a filing with UK regulators today, Ackman said. Kraft, based in Northfield, Illinois, has until January 19 to modify its offer for Uxbridge, England-based Cadbury, the maker of Dairy Milk chocolate.

Buffett's Berkshire Hathaway Inc., Kraft's biggest shareholder, said this month it voted against a plan to issue millions of shares to finance a Cadbury takeover, saying it amounted to a "blank check" to raise the bid.

Kraft advanced 46 cents to $29.58 in New York Stock Exchange composite trading yesterday. The stock has risen 7.8 percent since Berkshire made its statement.

Hershey Co. plans to bid at least $17.9 billion next week for Cadbury to rival Kraft's offer, the Wall Street Journal reported on its website, without saying where it got the information. Cadbury spokesman Trevor Datson declined to comment on the report when contacted by Bloomberg News on Saturday.

Ackman's investment "is a sign of great confidence in our management and our company's future prospects", said Michael Mitchell, a Kraft spokesman, in an e-mailed statement.

Ackman said Hershey Co., the Pennsylvania-based chocolate maker that's controlled by a charitable trust, won't submit a rival bid because it would imperil its own financial viability.

"I don't see how the trustees of a charity can put at risk everything that Milton Hershey built to do a leveraged buyout of Cadbury," he said. Hershey has been weighing a bid and has until January 23 to make a final decision.

Kirk Saville, a Hershey spokesman, declined to comment.

It's not the first time Ackman has laid a bet on a Cadbury takeover. In early 2007, he bought Cadbury shares on speculation that Kraft would buy the company, he told investors in a letter last year. He sold the stake in the last half of 2008 after concluding that turmoil in the credit markets made a sale less likely, he said in the letter, adding, "we were wrong".

Kraft's current offer for Cadbury, of 300 pence of cash and 0.2589 Kraft shares, consists of 61 percent stock and 39 percent cash, based on the closing value of Kraft's shares yesterday. Kraft is also offering Cadbury shareholders an option to substitute up to 60 pence of shares with cash.

Kraft may be able to increase the cash portion of its offer without further negotiations with its lenders. In addition to a £5.5 billion ($9 billion) bridge loan it is getting from Citigroup Inc., Deutsche Bank AG, and seven other banks, it has an agreement to borrow $3 billion (£1.84 billion), according to a December 4 filing with the US Securities and Exchange Commission.

Rosenfeld was in London last week meeting with major Cadbury shareholders. The UK company's shares have traded at a premium to her offer, which was first disclosed on September 7, as investors bet she will raise the bid or a rival offer will emerge. Cadbury fell 5.5 pence to 793.5 in London trading on Friday, while Kraft's offer currently values the stock at 771 pence.

A takeover of Cadbury would give Kraft, the maker of Toblerone chocolate and Tang powdered drinks, a faster-growing business and access to emerging markets.

The combined company would have about $50 billion in annual sales.

"There were so many investment banks working on the deal that there hasn't been good research on what the combination would look like," Ackman said. "We think that's among the reasons that Kraft is undervalued."

Lazard Ltd., Centerview Partners, Citigroup, and Deutsche Bank are advising Kraft, and Goldman Sachs Group Inc., Morgan Stanley, and UBS AG are counseling Cadbury. Seven other banks are part of a group of lenders for Kraft's bid. JPMorgan Chase & Co. and Bank of America Corp. are in discussions about financing a Hershey bid.