Hershey: Weighing a Sweet Deal With Tootsie?

Includes: HSY, TR, WWY
by: Todd Sullivan

If Hershey (NYSE:HSY) is not going to be sold, it needs to acquire in order to keep pace with the new Mars & Wrigley (WWY) combo.

Recently, Hershey reaffirmed its fiscal 2008 guidance and expects net sales growth to be in the range of 3%-4% and earnings per share-diluted from operations [EPS] to be $1.85-$1.90. The company reported revenue of $4.9 billion in fiscal 2007. According to Reuters Estimates, analysts on average are expecting the Company to report revenue of $5.1 billion in the same period.

On another note:
Gene Marcial, Business Week’s Inside Wall Street Columnist, says Tootsie Roll (NYSE:TR) is a buyout candidate:

Here is a review of the article:

1. Though the company has not performed well lately, as first-quarter sales tumbled, costs spiraled higher, and earnings are on a downward slope.

2. However, the “smart-money crowd” is starting to gather in the stock. That has lifted Tootsie’s share price since late April, when the stock traded at $23. It sprinted up to $27 by early June, where it has remained.

3. Tootsie Roll possesses many of the ingredients that make it a palatable buyout target; the company certainly needs new energy to spark a lift in sales, earnings, and stock price. And Tootsie Roll’s management hasn’t displayed the skills to improve the company in the current environment of rising commodity prices and stiffening competition.

4. Tootsie Roll’s chairman and CEO is now 88, and his wife, the company’s president and chief operating officer, is 76. They control some 76% of the class B voting stock and 54% of the common shares of the Chicago-based company, so the question of a hostile or unsolicited takeover at the Chicago-based company seems out of the question.

5. According to Mario Gabelli, “It looks like a sale will happen, although the big question is when.” Other big shareholders include Wells Capital Management, with a stake of 9.5%, T. Rowe Price (NASDAQ:TROW), which holds a nearly 5% position, and Barclays Global Investors (NYSE:BCS), with 4.3%.

6. Tootsie Roll is a well-recognized brand name, the balance sheet is strong with understated assets, cash flow, and dividend. But, earnings have been flat for years. And, that might attract its bigger rivals, which could see the prospect of rewarding synergies and potential growth in combining with Tootsie Roll. Such larger competitors include Hershey, Mars and Wrigley.

Hershey needs to expand its offering and Tootsie Roll is both ripe for buying and an iconic brand to add to the stable, even after the recent price increase. Tootsie sports a valuation of only 1.5 billion, roughly 1/4 that of Hershey.

One has to think that what Hershey would want is the name. Close some outdated production facilities and consolidate operations and cost saving would surely be available.

Disclosure: None