The news that Cadbury owner Mondelez is eyeing a takeover of US chocolate maker Hershey has created a sense of déjà vu in the confectionery world this week.
It’s not the first time that such a move has been on the cards. Mondelez made a similar approach in 2016 only for the effective owner, the Hershey Trust, to rebuff its $23bn bid. Inevitably, therefore, many are left wondering why this time will be any different.
The Hershey Trust – which includes members of the public from its eponymous town in Pennsylvania – has rejected at least three bids in the past two decades, meaning Mondelez will somehow have to persuade them now is finally the right time to sell.
This may come down to a few key factors. The first is whether Hershey sees its current headwinds as temporary or structural. Record-high cocoa prices are still dragging down profitability while there is the very real threat that GLP-1 weight-loss drugs will permanently affect people’s insatiable appetite for snacking.
If Hershey believes either of these threats is existential, it could find it hard to say no.
Hershey will also be weighing up the impact of Kellanova’s sale to Mars earlier this year. Bringing together brands such as Snickers, M&M’s, Pringles and Cheez-Its, the $36bn deal has created an even more formidable snack competitor, a move which Barclays analyst Andrew Lazar says may have seen it realise that ”operating as a standalone domestic chocolate manufacturer would not be sustainable longer term”.
Price, profit and premium
However, perhaps the biggest obstacle for any deal lies in the price. In 2016, Mondelez’s highest bid was set at an 18% premium on Hershey’s market price, while Hershey refused to consider anything below a 25%-30% premium.
Crucially, Hershey’s profits will also take an inevitable hit from any deal. The US confectionery giant holds an exclusive licensing agreement to sell Kit Kat and Rolos in the US, accounting for about 9% of its pre-tax earnings, according to Alexia Howard, a US foods analyst at Bernstein.
However, under the terms of the contract, a sale would see these distribution rights revert to Nestlé and “likely more than offset any potential synergies related to the deal”, Howard adds. “We view a deal between Mondelez and Hershey as unlikely, and that investors are overlooking Hershey’s existing [Nestlé] licensing deal.”
Mondelez itself is thought to still be largely motivated by addressing its self-confessed lack of presence in the US, the most profitable chocolate market in the world. Hershey could also help it expand some key brands into places like China, India and Europe.
Going it alone
But in the end, much of this decision will sit beyond its control. Not just with the Hershey Trust, but also the Pennsylvania government, which will hold a crucial say in the matter due to Hershey’s bylaws. These state that the Pennsylvanian attorney general must stop any deal if it is thought to be “unnecessary for the future economic viability of the company”, according to its latest 10-K financial report.
And could the president-elect even get involved? Following hot on the heels of a tie-up between advertising giants Omnicom and Interpublic, a merger of this size and significance will fuel the perception that Donald Trump’s next reign will be conducive to some of the country’s biggest companies joining forces.
But that is a long way off. Although Hershey’s share price of 11% this week shows a certain optimism among investors, Howard reckons this corresponds to about a 30%-40% chance of it going through. It is most likely that Hershey will stick it out alone yet again.
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