Hershey board 'must sacrifice control': report
"Unless the Hershey Trust is content with being relegated to a distant fourth in the global confectionery market, it must be willing to sacrifice its need for control," writes Gimme Credit analyst Craig Hutson, as rival Cadbury fields a bid from food giant Kraft
Gimme Credit analyst B. Craig Hutson, in a report to clients this morning, weighs the likelihood declining Pennsylvania candymaker Hershey Co., by itself or with Nestle, will try to outbid Kraft Foods' offer for British chocolate-maker Cadbury Plc. Excerpts:
"Cadbury and Hershey are no strangers to each other. Through a 1988 agreement, Hershey distributes Cadbury's chocolate products in the U.S. In January 2007, Hershey CEO Richard Lenny approached Cadbury about a merger. The meeting without the Board's knowledge ultimately led to Mr. Lenny's ouster." Still, "we would not be surprised if Hershey and Cadbury have rekindled their previous dialogue."
"A Hershey-Cadbury merger makes good strategic sense," joining Hershey's big role in the declining U.S. market with Cadbury's foreign sales and distribution. Kraft figures it could shave $625 million by combining duplicate operations. But a Hershey-Cadbury deal "would fall well short" in the cutbacks-and-savings column -- a good thing for Hershey's politically-sensitive Milton Hershey Trust, led by ex-PA Attorney General and central PA native LeRoy Zimmerman, which holds 78% voting control; but a bad thing from the dealmakers' perspective.
Could Cadbury buy Hershey? Up til now, "the Trust's position that it is not willing to cede control in a merger has rendered a transaction nearly impossible," given Hershey's small size vs its competitors. "Still, the Trust has reportedly hired JPMorgan to advise the company on its strategic alternatives."
Why does Hershey need to do anything? "A Kraft-Cadbury deal will put even more pressure on Hershey. It would eliminate Hershey's best option for overseas expansion. Unless the Hershey Trust is content with being relegated to a distant fourth in the global confectionery market, it must be willing to sacrifice its need for control."
But it may be too late. "Hershey is now much smaller than Cadbury... We find it hard to argue that the Hershey stock portion of any offer is more valuable than Kraft's. On the flipside, we don't believe Cadbury shareholders would react kindly to a lofty bid for Hershey. We are unable to construct a Hershey-Cadbury deal that is more attractive for shareholders than the Kraft offer."
And don't look to Nestle to bail out Hershey, Hutson concludes: Nestle is moving away from junk food and toward "health and wellness" products. "We do not expect a joint Hershey-Nestle bid for Cadbury...All of this is good news for Kraft and bad news for Hershey."