The cost savings from combining ought to be tremendous. — Bloomberg
AN acquisition of Hershey Co would mark the pinnacle of confectionary deal making. It would also be one of the sector’s most challenging takeovers to pull off.
For aspiring suitor Mondelez International Inc, the risk of an embarrassing failure is worth taking.
Mondelez is exploring a bid and has made a preliminary approach, Bloomberg News reported Monday. You can see the temptation to revisit the idea, even though Hershey repelled Mondelez’s advances in 2016.
A tie-up would unite geographically complimentary businesses, with Hershey giving Mondelez a bigger presence in the nicely profitable US market.
The cost savings from combining ought to be tremendous, especially at home: The duo could eliminate duplicate distribution and marketing functions and bring down procurement costs through greater buying power. Those efficiencies would be especially valuable given the challenges facing the confectionary business.
Consumer habits are changing. The rise of so-called GLP-1 appetite-suppressants, including Ozempic for diabetes and Wegovy for weight loss, are helping people manage their cravings.
Shoppers are watching their spending, and grocers’ cheaper private labels have taken a bite out of the name-brand market. Commodity price inflation – in particular for ingredients such as cocoa – has put further pressure on profit margins.
Such headwinds explain why Mars Inc recently agreed to buy Pringles-maker Kellanova, the company created when Kellogg Co spun off its North American cereals business in 2023.
The value from greater efficiency provides the justification for Mondelez considering what would need to be a generous offer.
Analysts at Barclays Plc suggest US$240 per share might be necessary – that equates to a 37% premium over Hershey’s share price last Friday, before its suitor’s interest became public. Such a proposal would value Hershey’s equity at US$49bil. Factor in assumed net debt and the total cost would be around US$54bil.
What would Mondelez get for this outlay? In financial terms, a business that analysts expect to generate US$2.5 bil in annual operating profit come 2026.
Add onto this the cost savings: In consumer transactions, expense reductions worth around 10% of the takeover target’s annual revenue should be achievable, implying around US$1.1bil of possible gains a year.
The return on investment wouldn’t be so high at first, but good enough. After all, Mondelez would have captured the greatest prize to be had in this industry.
The obstacles are threefold, two involving a “T” word: Antitrust, the Hershey trust, and Pennsylvania, where Hershey’s headquarters resides and where the company has a meaningful workforce.
Combined, the two firms would control over 16% of the global confectionary market, notes Jennifer Bartashus of Bloomberg Intelligence, citing Euromonitor data.
It’s widely expected that merger control will be more lenient under a Donald Trump presidency. How that plays out by sector and company remains to be seen, but Mondelez surely has bigger chance of winning over trustbusters today than eight years ago.
As for the Hershey trust, it controls the company through super-voting stock. There can be no deal without its say. The trust will need to be convinced that Hershey’s future is best secured within a larger multinational rather than through continued independence.
It is hard to know from the outside what structure of deal – whether in cash, stock or both – or what governance arrangements might be palatable. The challenges facing the industry today compared to 2016 may at least open up a conversation that could, perhaps, become a negotiation.
As analysts at Barclays point out, the trust might have grounds to engage if it saw the rise of GLP-1s, health and wellness trends and higher cocoa prices as structural threats that need tackling through a deal.
Or it might take a view that Hershey needs scale through a merger in order to compete with an enlarged Mars. The location of the head office and the name of the new company would be up for grabs, as last time.
Finally, under local bylaws, Pennsylvania’s Office of the Attorney General can intervene to obstruct a transaction. The implication is that Mondelez would have to make commitments to protect jobs in the state.
That might, in turn, lower the realised savings from a deal – or put the onus on Mondelez to find them almost entirely in its own operations. Given this is a highly synergistic combination, Mondelez should have a lot of options.
This was a compelling but difficult combination in 2016. Today, it seems even more logical while the difficulties appear slightly reduced.
Mondelez may look like it’s tilting at windmills in a pumped-up sugar rush. But in fact, its interest makes sense and there’s little downside to trying – and even failing – again. — Bloomberg
Chris Hughes and Andrea Felsted are Bloomberg columnists. The views expressed here are the writers’ own.
