11 pros and cons of Hershey's rejection of Mondelez's takeover bid
The sugar rush didn't last long. Thursday, Hershey's board of directors unanimously declined Mondelez's $107 per share cash and stock takeover bid, valued at about $23 billion. But before Hershey's announcement rejecting the deal, the company's stock soared 21% to a record high, closing up 16.8% on the day.
This mega deal could have rocked the food and beverage industry as industrywide consolidation continues. However, even though the original deal isn't proceeding, the fallout highlights the circumstances surrounding the companies directly and indirectly involved and the confectionery industry as a whole.
Following are 11 pros and cons illustrating the impact the Hershey's bid rejection could have on the industry, investors, and various companies linked to a potential buyout.
Pro: The Hershey Trust remains in charge.
The Hershey Trust controls 81% of the company's voting power and is thereby the gatekeeper for any potential deals. This unanimous decision against the Mondelez takeover differed from the last-minute fallout of a potential deal with Wrigley in 2002. What followed then was the removal of board members who supported the deal, and in 2008, the trust released a public statement saying it remained committed to holding onto its controlling interest in the company.
This is a financial issue and an emotional issue tied to the town of Hershey, PA, its residents, and the Milton Hershey School.
Con: A vulnerable trust.
The Hershey Trust is currently working with the Pennsylvania attorney general on a probe of the trust's board, which the AG is investigating for allegedly overpaying its directors and other conflicts of interest. Several of the directors resigned earlier this year. Now, some of the trust's current directors have Wall Street backgrounds. These changes and pressure from the AG could mean the trust would be more open to a sale.
Pro: Hershey could get more money out of the deal.
Mondelez has proven its willingness to sweeten the takeover bid by promising to protect Hershey employees' jobs, locate the company's global chocolate headquarters in Hershey, PA, and even rename the company to Hershey. Mondelez could be motivated to incrementally offer more incentives, either with a higher share prices, more perks that would appeal specifically to the Trust and Hershey, PA, residents, or a combination of the two. If Hershey holds out, Mondelez could eventually come back with an offer that even the Trust can’t refuse.
Morningstar analyst Erin Lash said in a note that she viewed Mondelez's offer as "a bit low." She wrote, "Assuming 3% cost synergies, we think an enterprise value/EBITDA multiple of 16-17 times (north of the low to mid-teens multiples that tend to characterize deals in the space, but warranted, given the low levels of private-label penetration in the confectionery category combined with the attractive profitability Hershey generates) seems reasonable, implying a price tag of nearly $30 billion or $120 per share, almost one fifth above our valuation."
Con: It's more than Hersheys Trust standing in the way of a takeover.
While much has circulated about how the Trust can block any takeover deal, it’s not the only party with that level of power — so does Pennsylvania's state attorney general. Even if the Trust did want to sell, the AG would have to approve any deal that could result in the Trust losing its voting control.
And the AG is likely to feel pressure from local residents concerning potential job losses. Mondelez did say it would protect Hershey employees’ jobs following the deal, but companies have made and broken such promises in the past—technically, including Mondelez.
When Mondelez was still a part of Kraft Foods Inc., Kraft purchased Cadbury in 2010 and vowed to protect jobs and keep the brand’s U.K. factory open. However, months later, Kraft announced it was closing the plant upon discovery of new information regarding its profitability.
If job losses were to arise from a Mondelez-Hershey deal in the future, Hershey, PA, residents would likely blame the AG for allowing the deal to proceed.
Pro: Mondelez may get activist investors off its back.
Mondelez showed moxie with this takeover deal. Activist investors, including Bill Ackman, have pressured the company to either cut costs and grow faster or sell itself. The company has cut costs considerably, leading to a 71% jump in profits and boosts to gross and operating margins in the latest reported quarter.
But revenue continues to fall, 17% last quarter, especially since Mondelez sold its coffee business for cash and a stake in Jacobs Douwe Egberts, formed last year from a merger of Mondelez and D.E Master Blenders’ coffee brands. A Hershey takeover would enable Mondelez to stabilize total revenues and prove to investors that Mondelez is committed to growth—not a sale.
The deal may have fallen through, but Mondelez has now publicly demonstrated its commitment to growth, which may cause investors to ease off their insistence for Mondelez to sell. Mondelez CEO Irene Rosenfeld told The Wall Street Journal in an interview last year, "I'm successfully running Mondelez for all shareholders—without the activists' help."
Con: The deal fell through, so Mondelez remains on the defensive.
It’s unclear whether Mondelez will continue to pursue this deal, or whether it will pursue another takeover of a similarly-sized company. Either way, without such a deal to hold off investors, speculation that another company could purchase Mondelez remains and keeps Mondelez on the defensive. Analysts have named Kraft Heinz as one potential buyer for Mondelez, if it's interested, and snacks giant PepsiCo has also come up as a potential suitor.
Con: Mondelez remains locked out of the U.S. chocolate industry.
That Mondelez would pursue a larger slice of the U.S. chocolate industry isn’t surprising, Lash told Food Dive via email.
"Despite its tie-up with Cadbury more than six years ago, Mondelez has essentially been locked out of the U.S. chocolate category because Hershey (which maintains 45% share of the space) acquired the rights to the Cadbury U.S. brands in 1988 in a deal that management has called 'ironclad,' " Lash said.
Losing out on Hershey means Mondelez’s options for penetrating the U.S. chocolate market is much more limited. Hershey and Mars dominate the market, with a 44% share for Hershey alone and another nearly 29% for Mars. After Lindt/Ghirardelli (9.5%) and Nestle (5.6%), all of the other chocolate companies in the U.S. combined only hold an 11.6% share, so Mondelez would have to buy a number of smaller brands to establish anywhere near the same foothold in the U.S. market.
Con: Mondelez misses out on an opportunity to boost its gum brands.
The gum category has already faced a slowdown in recent years as other confections and mints have leached sales and shelf space. Unit sales fell 3.4% in the 52 weeks ended April 2, according to Nielsen data. Mondelez is heavily invested in the category with brands like Trident, Stride, and Dentyne. But Hershey itself has been working with retailers to reduce shelf space for gum in favor of other confections, Lash told Food Dive.
Hershey has less of a presence in the gum category, with the exception of Ice Breakers, but this relatively small brand has been growing very quickly, Jared Koerten, senior food analyst for U.S. packaged foods at Euromonitor, told Food Dive. Hershey has been investing in innovation and marketing campaigns to boost the brand, such as packaging that fits in car cup holders. A Hershey takeover may have given Mondelez some insight into ways to turn around its own gum brand sales.
Con: Hershey continues to struggle internationally.
Hershey's business has been focused in North America, where the company derives about 85% of its global sales. The company has tried to expand internationally, but attempts like the Shanghai Golden Monkey deal in China haven’t gone well for the company, Koerten said.
A takeover by Mondelez could have changed that for Hershey, which could have leveraged Mondelez's "vast geographic network, combined with the local consumer and distribution insights it possesses," Lash told Food Dive.
Pro: Mars doesn't lose its ranking as global leader in the confectionery industry.
With 13.3% of the global confectionery market, Mars sits atop the industry with brands like Skittles, which it recently announced is the top non-chocolate brand in the U.S., M&M's, Snickers, Twix, Milky Way, 3 Musketeers, and its namesake chocolate bars. Mondelez ranks second, but purchasing Hershey (ranked No. 6) would push Mondelez past Mars with an 18% share of the global confectionery market.
Con: ...But that might not last long.
Mondelez could come back with another offer, which could then go the way of Anheuser-Busch InBev’s successful fight for SABMiller or McCormick’s eventual walking away from a bid for the U.K.'s Premier Foods. Food and beverage companies have proven that they won’t always give up so easily, and Mondelez has a lot on the line here.
But if not Mondelez, other suitors could be in line for Hershey. Speculation has surrounded a Nestle takeover of Hershey for years, which have in the past spiked Hershey's stock price. Analysts squashed those rumors at the time, but now that Mondelez has made a bid, that could pressure Nestle, which is ranked No. 4 among global confectioners, to make its own move.
Also, Hershey has the rights to Nestle's Kit Kat brand in the U.S., though the company pays Nestle royalties from sales. A merger could unite that brand and give Nestle a much stronger foothold in the U.S. chocolate market.
Other potential suitors for a Hershey takeover could be Kellogg or General Mills, according to Citi analysts.
Hershey has seen two spikes in its share price due to two separate rumored or actual takeover bids in less than a month. The potential of a Hershey sale is ripe for speculation and could actually happen this time around if pressure on the Hershey Trust increases and the right offer comes. Much is at stake, as it often is with industry consolidation deals of this magnitude.