Hershey: Ripe for Cadbury's Picking

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Includes: CSG, HSY, WWY
by: Wayne Mulligan

Well, this was a first for me – a question on TickerHound.com was directed right at yours truly:

"Hey Wayne, what do you think about Hershey now?"

I wrote an article about 2 months ago on Hershey's Chocolate (NYSE: HSY). In the article I discussed a merger that Hershey had arranged a couple of years ago with Wrigley (NYSE: WWY), which ultimately never went through due to Hershey's largest shareholder, The Hershey Charitable Trust, deep-sixing the deal at the last minute.

At the time, I felt the door to doing a deal between these two companies was still wide open.

But now, that door has officially been shut and has put Hershey in a very awkward position.

As of Monday morning, Mars, Inc., the largest candy maker in the world, agreed to acquire Wrigley for $23 billion… that's a 28% premium to last Friday's closing price. The company had a little help doing this deal too.

A long time admirer and someone who was very vocal about his desire to own Wrigley's, Warren Buffet, will provide some of the financing for the deal.

So back to the question, where does this leave Hershey now?

Well, it obviously leaves Hershey in a much more vulnerable position than it has ever been before.

Mars-Wrigley is a virtual powerhouse in the candy market with distribution on almost every continent and some of the most valuable brands in the world – I mean, who hasn't eaten a Snicker's bar or M&M's?

At the conclusion of my last article I put forth two scenarios – Hershey would either:

  1. Merge with Wrigley – That's obviously out of the question now.
  2. Merge with Cadbury (NYSE: CSG) – a situation that's looking more and more likely.

The company could also stay independent but as they try to compete on a global level with Mars, I think even the hard-headed Hershey's Trust will agree that they'll need a European distribution partner in order to gain traction overseas.

But a few things have changed between now and when Hershey was first engaged in talks with Cadbury in January of 2007:

  1. We're in a bear market and Hershey's stock has gotten hit hard over the last year. To put it in perspective, Hershey's is off almost 25% since they began talking to Cadbury and Cadbury's is up about 8%. That gives Cadbury a lot more leverage in this situation.
  2. Due to the fact that Cadbury has a lot more leverage and Hershey's business is going to increasingly come under assault in the US and abroad by Mars-Wrigley, Cadbury could get Hershey at a much lower valuation and close the deal under much more favorable terms. Originally Cadbury agreed to spin-off its beverage unit in order to get the deal done. That might not be a concession Hershey has the ability to push for this time around.
  3. Most of the top dogs at Hershey are no longer there. The company was effectively taken over by the Hershey Charitable Trust; an organization that has very little operational or strategic experience in the candy market. To say that these guys are going to be able to come in and cut the best possible deal for Hershey's shareholders is wishful thinking.

And if that weren't enough, Cadbury obviously knows one of the only other possible merger candidates is out of the picture entirely now, thus putting them in a MUCH stronger negotiating position.

But at the end of the day, in this writer's opinion, this deal has to get done one way or the other. It would just be too difficult for Hershey to remain independent.

So while I might've argued that Hershey could've been the value play of the year 2 months ago, I'd be a little less optimistic in my profit projections now given how dramatically things have changed for the company.

Disclosure: None