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Hershey: A Sweeter Bid

Hershey (HSY) created a stir four years ago when it put itself on the block, attracting an offer from Wm. Wrigley and a joint one from Nestl? (NSRGY) and Cadbury Schweppes (CSG). Under pressure from Pennsylvania lawmakers, Hershey walked away from the table. Now it might be coming back. "There is talk that Hershey could get a new bid, and it may be difficult to resist," says Michael Metz of Oppenheimer, which owns shares. "With institutional investors no longer passive, management can't turn down an offer without risking a bruising proxy battle," he argues. In its 2002 bid, Wrigley offered 44.50 a share post-split, and Nestl? and Cadbury made an all-cash joint offer of 35. The stock now trades at 52. The Hershey Trust, benefiting the Milton Hershey School, which owns 31% of the common shares and 78% of voting stock, rejected earlier offers. But some trustees feel a stronger obligation to diversify, says Metz. One reason: Since May, Hershey stock has fallen 21%. Even so, Jeffrey Kleintop of PNC Financial Services (PNC), which owns 1 million shares, is unfazed. "We are in it because of Hershey's potential," says Kleintop, who sees the stock at 70 in a year. Richard Joy of Standard & Poor's (MHP), who rates the stock a "strong buy," says Hershey is "the best growth story in the food industry," with a strong balance sheet and earnings, expanding margins, and a "dominant position in the fast-growing U.S. confectionery market." Joy sees 2006 earnings of $2.55 a share (including stock-option expenses) and $2.82 in 2007, vs. 2005's $2.28. His 12-month price target: 67. Nestl? and Cadbury declined comment, and the Hershey Trust couldn't be reached.

Note: Unless otherwise noted, neither the sources cited in Inside Wall Street nor their firms hold positions in the stocks under discussion. Similarly, they have no investment banking or other financial relationships with them.

By Gene G. Marcial

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