Mondelez International Inc. made a roughly $23 billion bid for Hershey Co. in an effort to create the world’s largest candy maker at a time when both companies’ sales are under pressure.
Mondelez, which makes Oreo cookies and Cadbury chocolate bars, recently sent a letter to Hershey proposing a tie-up at $107 a share, half in cash and half in stock. Hershey’s board unanimously rejected the bid Thursday and said it “provided no basis for further discussion.”
Still, Hershey shares surged 17% to $113.49 on news of the offer—first reported by The Wall Street Journal—remaining elevated even after the company rejected the bid, in an indication investors believe Mondelez won’t be discouraged. Mondelez shares gained 6% to $45.51, giving the snack giant a market value of more than $70 billion.
A takeover of Hershey, known for its namesake Kisses and chocolate bars, would face obstacles. Any deal would require the approval of the Hershey Trust, which holds 8.4% of its common stock and 81% of its voting power and has opposed a sale in the past.
A spokesman for the trust, whose board includes three Hershey directors, declined to comment.
In preparing its bid, which was disclosed in a private letter last week, Mondelez took steps to win over the trust. The Deerfield, Ill., company pledged to protect jobs, locate the merged company’s global chocolate headquarters in Hershey, Pa., and rename it Hershey, said a person familiar with the matter.
A Mondelez-Hershey merger would bring together the candy industry’s second- and fifth-largest players by revenue, according to research firm Euromonitor. Mondelez is second only to Mars Inc.
The union would be expected to face little resistance from antitrust authorities, as Mondelez doesn’t have its own presence in the U.S. chocolate market. Hershey, which makes the Cadbury chocolate sold in the U.S. under a licensing deal with Mondelez, has a limited presence outside the U.S.
Among the potential hurdles for Mondelez: its bid could flush out other parties who might covet Hershey. Nestlé SA is one possibility. The Swiss food giant, which has a big chocolate business, licenses its KitKat brand to Hershey in the U.S. But Nestlé could face bigger antitrust issues in the U.S. if it were to try to buy Hershey.
Nestlé has the right to reclaim control of KitKat at no cost if someone else buys Hershey. That could reduce Hershey’s value to Mondelez by $3 billion, according to a person familiar with the matter.
The Hershey Trust, established by the 122-year-old company’s late founder, Milton Hershey, is the biggest potential roadblock. The trust’s primary beneficiary is a school for underprivileged children in Hershey’s hometown.
Mr. Hershey was considered as much a philanthropist as an entrepreneur. As he built the chocolate company, he raised a town as well, erecting a bank, a department store, churches, golf courses, a zoo and a trolley system. Then, in 1909, he and his wife, Catherine, founded a school for orphan boys, now called the Milton Hershey School. Today the lavishly appointed private school serves disadvantaged children of both sexes.
Over a decade ago, chewing-gum maker Wm. Wrigley Jr. Co., now a unit of the privately held Mars, tried to buy Hershey, but resistance from the trust scuttled the deal at the last minute. A joint bid from Nestlé and what was then Cadbury Schweppes was also rejected.
The Pennsylvania attorney general is investigating the trust’s board for alleged overpayment of directors and conflicts of interest, and the trust has said it is working with the attorney general’s office on the probe. This year, several of the directors have resigned, which could change the board’s attitude toward a possible sale. Indeed, a person familiar with the matter said the trust, which now includes some directors with Wall Street backgrounds, may now be more open to a deal.
It also isn’t clear how any any deal would be received in the town of Hershey, where streetlights along Chocolate Avenue are topped with giant Hershey kisses.
Hershey had sales of $1.8 billion in the first quarter, a 5.6% decline from the year-earlier period, in part because of adverse currency moves. In 2015, the company had sales of $7.4 billion and earnings of $513 million. The company has about 80 brands, and has recently moved to court more health-conscious consumers.
Mondelez, based in Deerfield, Ill., had sales of $29.6 billion in 2015, down 14% from a year earlier, also partly due to currency swings. In the first quarter, its revenue fell nearly 17% to $6.5 billion, amid pressure on its coffee business.
Mondelez has a complicated deal-making history. The company is the product of a 2012 separation from Kraft Foods Inc., which had been under pressure from Trian Fund Management LP and other activist investors. That came only two years after Kraft had acquired the U.K. chocolate company Cadbury PLC for $19 billion, and the chocolate assets went with Mondelez in the separation.
When Kraft bought Cadbury in 2010, it promised it would protect jobs in the U.K. and keep open a factory there. Within months, it announced it would close that plant after saying it had learned new information about its profitability. The U.K.’s Takeover Panel criticized the company and its bankers for the reversal.
Last year, William Ackman’s Pershing Square Capital Management LP disclosed a 7.5% stake, worth $5.5 billion at the time, betting the company would become a target, rather than an acquirer, in a coming wave of consolidation in the snack industry. Mr. Ackman recently trimmed the Mondelez stake to 5.6% including options.
Trian also has a 3% Mondelez stake and the firm’s co-founder, Nelson Peltz, is on the snack company’s board.
Trian in 2013 unveiled stakes in PepsiCo Inc. and Mondelez and began pushing for a merger of the two to be followed by a spinout of Pepsi’s beverage business. Pepsi rejected the idea, and Trian dropped its call for a merger when Mr. Peltz joined Mondelez’s board in 2014.
By Liz Hoffman, Dana Mattioli and Dana Cimilluca
Source: Wall Street Journal
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