Hershey Co. losing money while preserving its trust

Hershey may or may not be the Sweetest Place on Earth.

It is a candidate for the most socialist place in Pennsylvania, where politicians labor loyally to preserve the union between Hershey's namesake company, charity, school and town, no matter what forces are at work in the larger world.

Hershey Co. shareholders lost three-quarters of a billion dollars last week after former Pennsylvania Attorney General LeRoy Zimmerman, in a Sunday newspaper column, declared on behalf of the Hershey Trust, which controls the chocolate-maker, "We will not sell the Hershey Co."

Milton Hershey left instructions to fund his charity "in perpetuity," noted Hershey Trust spokesman Tim Reeves. "The trust has a long-term point of view and doesn't weigh in on the ebbs and flows of daily activity."

The state claims a special relationship with the Hershey Trust, since it regulates charities. Hershey Co. is publicly traded - you might have a piece, if you or your pension plan owns Fidelity, Vanguard or T. Rowe Price investments - but the trust, of which Zimmerman is chairman, controls voting shares through a special class of stock.

Attorneys general and other sale opponents have succeeded over the years at second-guessing and replacing Hershey directors, stonewalling suitors that tried to buy the company at premium prices, and frustrating shareholders.

But they haven't been able to get Americans to buy more Hershey bars.

Even if you count dividends, Hershey investment returns are essentially flat over the last five years.

By contrast, Nestlé S.A., which tried to buy Hershey in 2002, earned its shareholders 19 percent a year. Cadbury P.L.C., another potential merger partner, is up an average of 10 percent. And Mars Inc., Hershey's old rival, plans to buy Wm. Wrigley Jr. Co., a third ex-Hershey suitor.

No wonder the Hershey Trust, which depends on the company for a large share of its income, offered Hershey Co. for sale in 2002, in an attempt to spread its risk.

But that got squashed by D. Michael Fisher, the state's attorney general at the time, after Hershey residents marched in protest.

Pennsylvania is full of ruins. Pottsville hasn't recovered from the collapse of anthracite coal 50 years ago. Pittsburgh, Johnstown and dozens of valley boroughs still miss Big Steel (though Conshohocken and Phoenixville are getting over it).

The great Baldwin Locomotive Works factory site in Delaware County now houses a Wal-Mart - and it's not an improvement if you're comparing payrolls.

So, yes, Hershey people have reason to worry. "They're fearful, if Nestlé or another big company bought it, they'd lose all the headquarters jobs, and they'd lose their special place in America," said Hershey native Gregory Waybright. "I work in corporate America, but I would still hate to see Hershey change hands."

But keeping Hershey Co. independent hasn't kept the ravages of competition away. Last winter, the company said it would close its Reading plant and send jobs to Mexico.

Investors see the abortive 2002 sale as a lost opportunity. Hershey, Mars' longtime rival, has become a "niche player," below "full-service global" players Mars-Wrigley and Cadbury, and "second-tier global players" Nestlé and Kraft Foods Inc., wrote Alexia Howard of Bernstein Research after Zimmerman's column.

"Strategically, Hershey is in dire straits, operating a mass-market chocolate business in a slow-growth market," Howard said. "We consider it highly unlikely that anybody, especially Cadbury, will want or be able to acquire Hershey." She advised Zimmerman's board to seek "a joint venture" with Nestlé, which is also in danger of falling behind.

The stock kept dropping after Hershey management met with investors Tuesday.

"The trust's goal [is] retaining control of the company," wrote Robert Moskow of Credit Suisse, after watching new Hershey chief executive officer David West lay out "not particularly compelling plans" to keep up with Mars-Wrigley. "Perhaps the trust is satisfied with waiting" for profits to rebound. "Perhaps, given the legacy of Milton Hershey and the laws of the state of Pennsylvania, they feel like they have no choice."

West told investors: "Our business has not performed to our expectations." He added, "We have great brands," including new Bliss and Starbucks lines.

Zimmerman said Milton Hershey's intentions and state law made selling Hershey impossible. But why blame the laws? Pennsylvania lawmakers can change them fast enough, as they did in 2002, when they made it easier for future attorneys general to object if a future Hershey board tries to sell the company again.

The Hershey School has about 1,700 students. If its $7.2 billion portfolio yields a conservative 5 percent a year, it can budget more than $200,000 per student per year. For that kind of money, you could pay a couple of public school teachers - with benefits - for each student, or run half a Catholic parochial school. Of course, "when you're boarding people it's a much bigger number," said trust spokesman Tim Reeves. "And they've been investing in new facilities in a huge way."

Sweet. But it's all threatened by the company's declining fortunes.

OK, let's say there really is room in America for an industrial commonwealth, where labor, capital and first-class boarding schools for poor children coexist in harmony, roller coasters rumble behind the trees, nobody worries about children getting fat, and the air smells like candy when the wind blows just right.

All this is threatened by the tension with shareholders. "Going private" buyouts have become more difficult since last year's credit crunch. Trust spokesman Reeves would not comment on the chances for taking Hershey off the market.

But Hershey Trust's goals don't match Wall Street's. Why does this stock still trade?