That's the way the chocolate melts.
Mondelez, the $67 billion maker of Oreos and Cadbury eggs, said late Monday that it's giving up on takeover discussions with rival confectioner Hershey. That's not great news for investors in the would-be target, who are now facing a return to Hershey's flatlined stock price and slow-growth future. But Mondelez shareholders should be happy that in the end, it didn't get its treat.
The snackmaker had reportedly raised its offer for Hershey to $115 a share last week. That's roughly 7.5 percent more than Mondelez's initial cash-and-stock proposal, itself a pretty meager premium that was almost automatically rejected by Hershey. The chocolate company was said to have wanted a bid of at least $125 a share on the table before it would even begin discussions, according to the Wall Street Journal. If Mondelez had done that, and paid for half its offer in cash, a deal wouldn't add much to earnings before accounting for synergies, according to data compiled by Bloomberg. The math would just get shakier if the price had continued to go up.
Getting out now allows Mondelez to walk away with a sense of discipline. It also saves itself -- and its shareholders -- from what was bound to be a distracting and protracted effort to win approval from Hershey's controlling family trust, which has scuttled deals in the past. The trust may not have been in a position to sign off on a deal any time soon even if it wanted to. The entity is in the middle of a significant overhaul; many members will resign and the trust will adopt various governance changes as part of a settlement with the attorney general of Pennsylvania.
Even if Mondelez had been able to get Hershey to agree to a more digestible price, this may not have been the right deal for the company, anyway. Hershey, which sells Reese's peanut butter cups and York peppermint patties along with its eponymous chocolate bars, doesn't sell the kind of healthier, organic and natural foods that are the real growth areas in food these days. Sure, there are costs that could be cut and revenue synergies that could be wrung, but what then? Eventually the company would have to do another deal to keep sales churning higher.
3G Capital has shown that combining acquisitions with aggressive cost cutting can create substantial value. The investor acquired Heinz in 2013 and then merged it with Kraft last year. But Mondelez isn't 3G, at least not yet. It's got a ways to go to get its own house in order before it starts adding on new challenges. The company has adopted 3G's budgeting tactics and is targeting an adjusted operating margin of 17 percent to 18 percent by 2018, up from about 14 percent in 2015. That's nice -- but analysts' 2016 projections for KraftHeinz suggest an (unadjusted) operating margin of more than 25 percent.
Even KraftHeinz shares may be running out of upside, if you ask Susquehanna analyst Pablo Zuanic. He thinks another acquisition would make the company's stock a much more appealing investment. How about a Mondelez-sized snack?
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
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