Analysts have poured cold water on the chances of Mondelez securing a blockbuster takeover of rival chocolate maker Hershey as reports surfaced that the Cadbury owner had made a preliminary approach to the Reese’s supplier.
A tie-up would create one of the world’s largest snacking groups – rivalling the newly enlarged Mars Kellanova – with combined revenues of around $50bn, as well as addressing Mondelez’s under-representation in the US chocolate market.
However, Hershey reportedly rejected an initial offer from Mondelez as being too low, according to Bloomberg on Wednesday. It follows Hershey, which has a market cap of almost $40bn, rebuffing a $23bn bid from Mondelez back in 2016.
Bernstein analyst Alexia Howard viewed a deal as “unlikely” and said investors – who sent Hershey shares soaring 13% on the news – were overlooking the Pennsylvania-headquartered group’s existing Rowntree licensing deal.
Hershey entered an agreement with Rowntree (which was later purchased by Nestle) in 1970 giving it a US license in perpetuity for KitKat and Rolo. Bernstein estimated these two brands accounted for 7% of Hershey’s sales ($750m) and 9% of EBIT ($220m).
Any takeover of Hershey would trigger a change of control clause and see the distribution rights shifting back to Nestle.
Howard said it made Hershey “a less attractive take-out target” and would more than offset any potential synergies related to the deal.
“We think the risk-reward here skews negatively here,” she added.
Andrew Lazar of Barclays also highlighted other significant hurdles, including the need for a voting majority from the Hershey Trust, as well as the blessing of Pennsylvania’s attorney general. Hershey’s dual-class stock arrangement gives the fully independent Hershey Trust 80% of voting control over the group, while the trust’s bylaws also allow the local attorney general to seek judicial review of any transaction.
Lazar added the chances of the Hershey board and trust voting for a deal would depend on their view of the challenges presented by soaring cocoa prices and any potential impact from GLP-1 weight loss drugs.
Shares in Hershey have returned to close to levels traded at before speculation surrounding a deal emerged.
Neither company has officially responded to the media reports.
On Wednesday, Mondelez released a statement about a $9bn share buyback programme but made no mention of the Hershey approach. The group also said it would continue to focus on bolt-on deals similar to the acquisitions of Clif and Ricolino in 2022, which were both below $3bn, significantly smaller than the $40bn plus a premium needed to take on Hershey.
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