Commentary: How Hershey Made a Big Chocolate Mess

By Amy Barrett

Is this any way to sell an icon? Hershey Trust Co., which controls 77% of Hershey Food Corp.'s (HSY ) voting shares, has set off a firestorm with its decision to put the candy maker on the block. Irate workers and residents have waged noisy rallies in this normally quiet, quaint town. They are outraged by the mere thought of selling their venerable hometown company, whose chocolate bars in their silver-and-brown wrappers have helped define the community for generations.

The proposed sale is even emerging as a hot-button issue in the upcoming Pennsylvania gubernatorial race: Pennsylvania Attorney General Mike Fisher, a candidate for governor, has filed a petition calling for the terms of any offers for Hershey to receive court approval.

It didn't have to get this messy. True, the hometown uprising would have been hard to avoid. But the trust's handling of the proposed sale has made a difficult situation much worse. The trust's first misstep was its failure to foresee the magnitude of the public protests; just as important, there are signs that the board of the trust itself may be at odds over the wisdom of a sale. And as opposition to a sale grows within the local community, any deal that the board now strikes will come under intense scrutiny. The bottom line: The board must get top dollar to justify the disruptive sale, even as it pushes potentially expensive demands that any buyer protect jobs in the community. That could make it far more difficult to get a deal done.

Certainly, the trust has some very good reasons for exploring a sale. Diversification is the key motivation: The Hershey Trust Co. is legally responsible for overseeing the assets of the Milton Hershey School, created by Hershey's founder in 1909. The school provides free room, board, and education to underprivileged children. More than half the school trust's $5.4 billion portfolio is in Hershey stock. Rather than sell a small noncontrolling stake, the trust company figured selling its entire stake would bring a higher price per share, a so-called control premium. Three likely bidders have emerged: Nestlé (NSRGY ), Kraft (KFT ), and Cadbury Schweppes (CSG ).

Still, the trust company's board failed to build support for a sale from the various interested parties. "You don't do this without taking into account the damaging ripple effects that could occur," says J. Bruce McKinney, a former trust director. "They were either naive, got bad advice, or both."

Even within the board itself, at least one director has stated he doesn't believe a deal will ever go through. The trust's main fiduciary responsibility is to the children of the Milton Hershey School. But members of the school's alumni association and some former trust directors argue the sale could destabilize the Hershey community, which would directly harm the school and its students. The trust board, they contend, should have done a study to determine the impact of a sale on the students. Such a study might have won support and blunted some of the current attacks against the board's decision.

So, who, if anyone, will likely wind up with Hershey and its $4.6 billion in sales? Nestlé clearly has the edge: In the event Hershey is sold, analysts say Hershey's U.S. licenses to the Kit Kat and Rolo brands would revert to Nestlé. So other possible buyers, like Kraft and Cadbury, would probably have to exclude the value of those brands, with estimated sales of $250 million, when calculating their offers. Still, Nestlé would face its own hurdles, including the possible lowering of its credit rating and potential antitrust problems.

As the board waivers over what to do, tensions are likely to grow. "A company is a web of relationships with employees, customers, and suppliers," says one food industry investment banker. "Every time you go through [the sale process], it disrupts those relationships." Clearly those repercussions will be felt for a long time in Hershey, Pa., where even street lamps are in the shape of Hershey chocolate kisses.

Barrett is BusinessWeek's Philadelphia bureau chief.

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