Kraft Foods (KFT) has agreed to sell its North American pizza business to Nestle for $3.7 billion in cash. The transaction is expected to close in 2010.

The sale includes the DiGiorno, Tombstone and Jack’s brands in the U.S., the Delissio brand in Canada and the California Pizza Kitchen trademark license. It also includes two manufacturing facilities in Medford and Little Chute, Wisconsin and the right to take on the leases for the pizza depots and delivery trucks. The pizza business is estimated to have generated 2009 net revenues of $1.6 billion.

Nestle could fund this acquisition with the proceeds from the recent sale of its stake in eye-care company Alcon Inc. (ACL) to Swiss drug maker Novartis AG (NVS) for $28.1 billion in cash.

Kraft said that it would use the proceeds to increase its bid for Cadbury Plc (CBY) by 60 pence per share. The company will offer an increased proportion of cash in its tender offer for the UK confectioner. In addition, Kraft extended the acceptance period for Cadbury shareholders to tender their shares from Jan 5 to Feb 2.

Kraft had first proposed a takeover of Cadbury in September 2009 for £10.2 billion. This comprised 300 pence in cash and 0.2589 new Kraft Foods shares per Cadbury share. However, Cadbury rejected the offer. The new offer will increase the cash proportion to 360 pence per share. The overall size of the offer remains same with reduced proportion of shares.

In a separate announcement, Nestle clarified that it does not intend to make, or participate in, a formal offer for Cadbury.

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