Cadbury Bid May Be Sticky Business for Hershey

As children are often told in the candy aisle: Just because you want something doesn't mean you can have it. Hershey (HSY) would like to buy Cadbury (CBY). On Nov. 18, Hershey confirmed press reports it was considering a deal for the British candy and chocolate maker. But making the deal happen, experts say, could be rather difficult. "There can be no assurance that any proposal or offer from Hershey will be forthcoming," Hershey's statement said. To boost its chances, Hershey reportedly is working with privately held Italian confectioner Ferrero. Among the duo's top challenges is a rival bidder: Cadbury is already the subject of a hostile bid by Kraft Foods' (KFT), a bid of more than $16 billion that Cadbury's executives have called inadequate. Hershey's Hunger for Global GrowthThe reasons for Hershey's interest in Cadbury are clear, analysts said. The two companies have explored deals in the past. "Cadbury is a pretty good fit with Hershey," says Standard & Poor's equity analyst Tom Graves. Hershey gets 86% of its revenues from North America, and Cadbury could give Hershey access to the rest of the world. Based in the United Kingdom with strong distribution networks in many fast-growing emerging economies, Cadbury is a global player. According to research firm IBISWorld, Cadbury has the global candy and chocolate industry's second-largest market share, at 10.2%. Many other American food and consumer staples firms, including Kraft, see much better growth prospects in developing economies than in the U.S., Graves says. Hershey has tried to expand sales beyond U.S. borders in recent years, with limited success. In 2007 it formed a joint venture with a South Korean confectionery firm, and acquired majority ownership of an Indian candy company. Deal's Size Is One ObstacleOne could argue that Hershey, because it is so dependent on U.S. sales, really needs Cadbury. "Cadbury, in our view, is significantly more important to Hershey's long-term success than to that of Kraft," BMO Capital Markets analyst Kenneth Zaslow wrote Nov. 18. "Hershey's long-term growth rate is limited by the inability of its product to travel far beyond the U.S. borders." A deal will be difficult, first because of Cadbury's size. Kraft's $16.4 billion cash-and-stock offer is almost double Hershey's market capitalization of $8.6 billion. The finances of Ferrero, privately owned by its founding family, are not public. Credit Suisse (CS) analyst Alex Molloy estimates the two firms could borrow about £7.5 billion ($12.6 billion) to complete a deal. Ferrero isn't publicly traded, so Hershey would probably have to raise the rest of the purchase price—however high bidding with Kraft goes—by issuing billions of dollars in new shares. That is complicated by Hershey's unusual ownership structure, in which the firm is entirely controlled by the Milton Hershey Trust. "That could be a hurdle," says Morningstar (MORN) analyst Erin Swanson. "The trust has stated repeatedly that they do not want to give up control of Hershey." "Best Strategic Fit"Another challenge is how Ferrero and Hershey would divide up, or jointly run, Cadbury. "Any deal involving [Hershey] and Ferrero would be complicated," Molloy warns. "There is no obvious way to split up the assets, as for the most part both companies could feasibly want any part of Cadbury." If Hershey can work out financing and make partnership arrangements with Ferrero, it could have advantages over Kraft in the fight for Cadbury. First, Swanson says, "the best strategic fit for Cadbury lies with Hershey." In a Kraft bid, Cadbury shareholders would receive shares of a slower-growing, mature packaged-food business. But, Swanson says, Hershey has wider profit margins and the ability to grow worldwide through a Cadbury tieup. Hershey and Ferrero might also want Cadbury more than Kraft does. Careful of protecting its dividend, Kraft has made clear it does not want to overpay for Cadbury. With details still fuzzy, the fight over Cadbury may just be in its early stages. But in a global candy marketplace dominated by larger players, Hershey may need the boost Cadbury can provide to stay competitive.

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