Deals

Tara Lachapelle is a Bloomberg Gadfly columnist covering deals. She previously wrote an M&A column for Bloomberg News.

Gillian Tan is a Bloomberg Gadfly columnist covering deals and private equity. She previously was a reporter for the Wall Street Journal. She is a qualified chartered accountant.

Snacks giant Mondelez made a bid for Hershey, the $24 billion maker of the iconic American chocolate bar. Many will tell you that any offer is dead on arrival because Hershey is controlled by a family trust that's long been opposed to selling the company. (Indeed, Hershey put out a statement Thursday afternoon saying it rejected Mondelez's $107-a-share offer.)

But here's why it shouldn't spurn a suitor out of hand:

Sugar Crash
Like many big food manufacturers, Hershey's growth has slowed and its stock has been a bore.
Source: Bloomberg

For nearly three years, Hershey's stock price has been flat. Candy and chocolate aren't exactly fast-growing areas of the food market, there's not a whole lot of room to innovate and millennials are driving a consumer shift toward healthier snacks. Short sellers are even beginning to take a bite out of the company:

Not So Sweet
The number of investors betting against Hershey is at its highest since 2010.
Source: Markit, Bloomberg

Hershey's valuation may be looking increasingly too rich to justify -- unless of course a deal does take place. That's not to say the company should run with the first offer Mondelez makes. After all, Mondelez is backed by big activist shareholders Bill Ackman and Nelson Peltz, and one would think they'd keep M&A negotiations from resulting in too frothy a price.

But the food industry is consolidating at a rapid pace, and acquirers are proving willing to pay higher valuations than in the past given the growth challenges they're up against. That means now's the time to hear out suitors and push for the best takeover price possible -- not summarily dismiss the idea of a deal. It could be good for Hershey shareholders.

They're Hungry
Faced with weak growth prospects, increasingly health-conscious consumers and competition for store shelf space, leading food manufacturers are turning to deals, both large and small.
Source: Bloomberg

Hershey should hold a formal auction process and see who else comes out of the woodwork...perhaps Nestle, Kellogg -- or even Warren Buffett (it's no secret that the billionaire's sweet tooth has motivated some of his past acquisitions), either with or without an assist from 3G Capital. 

Nestle could pay well north of the $107 a share that Mondelez offered. In fact, if it stumped up an all-cash offer of $124 a share for Hershey, representing a decent 30 percent premium to Wednesday's closing price, the purchase would still immediately boost earnings even without accounting for synergies, according to data compiled by Bloomberg.  A deal at those terms would actually be even more accretive to Kellogg, boosting its earnings by almost 20 percent, according to Bloomberg data. 

Notably, Mondelez's offer -- a mix of cash and stock -- represents a mere 10 percent premium, which is well below this year's global average of 32 percent. While maintaining the same ratio of cash and stock, it can afford to pay roughly $116 a share while having the deal remain accretive before any synergies, Bloomberg data show.

Hershey leaped to almost $118 a share, but investors curbed their enthusiasm after the company's statement. The fact that it's still hovering at roughly $112 a share indicates that traders think Hershey may still be in play and can fetch a higher price than what Mondelez offered.

Off The Mark
Despite recent speculation, Wall Street hasn't been pricing in the chance of a Hershey takeover.
Bloomberg

Poor Bill Ackman, though. He just can't catch a break. In March, Pershing Square trimmed its stake in Mondelez after the holding became outsized compared to the plummeting values of his investments in companies like Valeant. Any deal with Hershey seriously lessens the likelihood that the Oreo cookie maker will become a takeover target itself -- the very idea behind Ackman's thinking when he bet on the company last summer. This probably isn't the deal dessert he ordered. 

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

(Adds Hershey rejection in the second paragraph.)

To contact the authors of this story:
Tara Lachapelle in New York at tlachapelle@bloomberg.net
Gillian Tan in New York at gtan129@bloomberg.net

To contact the editor responsible for this story:
Beth Williams at bewilliams@bloomberg.net