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4 Potential Reasons Mondelez Bid For Hershey

NSRGY | July 1, 2016

Barclays has attempted to explain why Mondelez International Inc (NASDAQ: MDLZ), which makes Oreo cookies and Cadbury chocolates, made its $107 cash and stock offer for Hershey Co (NYSE: HSY), which eventually rejected the bid.

The acquisition would have created the world's largest candy maker at a time when both companies' are struggling to grow their top line.

But Why?

Here are the brokerage's few potential explanations of Mondelez's rationale:

1. "A defensive move in the context of speculation MDLZ could be a target."

A Wall Street Journal article, citing RBC's David Palmer, said Kraft Heinz Foods Co (NYSE: HNZ) could buy Mondelez, as it would help Kraft Heinz achieve international scale.

2. "An opportunistic approach in light of HSY's well-documented recent challenges and the strategic merits of a combination." 3. "A proactive attempt to use a deal to improve its own performance amidst emerging market challenges." 4. "A public move intended to assess its own strategic potential."

It is not easy to move the needle with Hershey, known for its namesake Kisses and chocolate bars, as any transaction would require the approval of the Hershey Trust, which holds 8.4 percent of shares and 81 percent of its voting power.

Interestingly, when considering the motivation, Barclays said, "We would observe that our analysis in the note does not necessarily suggest that the financial merits of this transaction are undeniable."

Analyst Andrew Lazar sees Hershey as a unique asset given its scale in the attractive U.S. confectionery market.

The analyst said he "frankly agrees" with the recent article on Wall Street Journal that said the public disclosure of Mondelez's bid could perhaps embolden other potential suitors to enter the fray.

Other Perspectives

The WSJ report specifically identified Nestle SA (ADR) (OTC: NSRGY) as a possible interested party. Notably, Nestlé did jointly bid with Cadbury for Hershey in 2002.

But, Citi analyst David Driscoll recently said a Hershey-Nestlé deal is "unlikely" due to the unique company specific factors, mainly the control of the Hershey Trust and Pennsylvania law.

In addition, there are headwinds in the form of Kit Kat and Rolo that Hershey licenses from Nestle in the United States. If Hershey is acquired, Nestlé would likely be able to reclaim the rights to these brands, which Barclays estimate may account for roughly about 8.5 percent of Hershey's total sales.

Shares of Hershey closed Thursday's trading at $113.49, while Mondelez finished trading at $45.51.

At time of writing, Hershey was down 0.36 percent on the day at $113.08, while Mondelez was up 0.07 percent at $45.54.