In mid-December, some Hershey (HSY -0.74%) investors might have thought their Christmas was coming early. A media report stated that a deep-pocketed suitor had made a preliminary offer to buy out the company. If accepted, Hershey was sure to fetch a sweet premium, given its high-profile brand name and its portfolio of familiar brands, including its namesake chocolate bars, Reese’s Peanut Butter Cups, and other goodies.
The stock’s rally lasted about as long as a hunk of chocolate placed on a live radiator. Two days later, news broke that the company’s controlling shareholder rejected the suitor’s bid. Here’s what Hershey investors and other interested parties need to know, including whether we can expect another takeover attempt before long.
Mondelez makes a move
The suitor was Hershey’s food industry peer, snacks specialist Mondelez International (MDLZ -0.18%). According to Bloomberg, which in two separate articles reported Mondelez’s actions, Hershey Trust felt the bid was too low. Apparently, Mondelez did not attempt to sweeten the pot with a more generous offer.
The day the second Bloomberg report was published, Mondelez announced that it was launching a new share buyback program, authorizing up to $9 billion in purchases of its common stock. This will kick off on Jan. 1 and be in force until Dec. 31, 2027, and it’s larger than the current $6 billion program it’s replacing. The company also, as expected, declared a fresh quarterly dividend, which at $0.47 per share matched its predecessor.
In its stock buyback/dividend announcement, Mondelez said that mergers and acquisitions are among its capital allocation priorities. However, in what seems very much to be a reference to its courting of Hershey, it will be “focused on bolt-on assets.” It cited relatively small acquisitions it has made in the recent past, suggesting that it’s not going to chase a big beast like Hershey.
Also, determined suitors tend to marshal their financial resources to help finance big-ticket deals. Mondelez feels it’s going in the opposite direction with the 50% boost in its share buyback authorization.
It’s hard to tempt the trust
Hershey Trust is an intriguing entity that’s unique in American corporate culture. Established more than 120 years ago as an entity managing aspects of Hershey’s business and philanthropic pursuits, including a school for orphaned boys, it controls most of the company’s B shares. Since these convey 10 votes per share instead of the one per the common stock that is publicly traded, Hershey Trust is effectively in control.
Over the years, it has been resistant to takeover attempts. In fact, this apparent Mondelez approach wasn’t that company’s first. In 2016 it offered roughly $23 billion, which Hershey said the board rejected unanimously. Mondelez hung in there for a while, but after two months it abandoned the pursuit.
Had Hershey Trust — not to mention, subsequently, the board — given the nod to the most recent proposal, the price tag would have been far higher. Even after the share price cooldown after the news of the rejection, Hershey’s market cap stands at nearly $34.5 billion these days. It isn’t the hottest business on the block, but both it and its leading products are famous and widely recognized among U.S. consumers. That alone would command a premium.
Some buyout sagas take unexpected swerves and twists, but I have a feeling we’ve seen the end of this one — at least for now. Mondelez hasn’t commented on the Hershey approach and isn’t likely to, but that upsized stock buyback program and those remarks about acquisitions strategy are signs that it’s moved on.
Hershey will have to go it alone
That might be best for Mondelez, although perhaps a premium sale is an opportunity missed for Hershey.
Chocolate and confectionery is a tough gig these days, mostly because cocoa, the most important input in the chocolate-making process, recently came down from all-time high prices — and not by much at that. A merged Hershey and Mondelez would enjoy better purchasing power, but that on its own doesn’t solve the problem of the stubbornly pricey commodity.
Expensive cocoa is affecting Hershey’s fundamentals, and that’s compounded by a long-tail trend toward healthier eating among U.S. consumers. Also, the popularity of GLP-1 weight loss drugs is sapping demand for sweet treats. With those headwinds, it’s little wonder that Hershey’s sales slumped by 1% year over year to just under $3 billion, and headline net income plummeted by over 12% to $446 million in its most recently reported quarter.
Again, given all this, I wouldn’t expect Mondelez to come back with a higher offer; Hershey Trust seems intent on not selling. I doubt other potential suitors would eagerly devote time and energy to the chase, either, given the trust’s clear reluctance to sell.
