LONDON (Reuters) — Swiss food group Nestle is likely to set a long-term goal of buying Hershey after the Kraft-Cadbury deal, hoping that market pressures will wear down opposition from the controlling Hershey Trust.
Nestle, the world's largest food group is set to drop to No. 3 in the chocolate world behind Mars-Wrigley and Kraft-Cadbury, an unfamiliar role for a company that holds No. 1 or No. 2 positions in all its key segments. Buying Hershey would solve that problem.
While the charitable Hershey Trust controls 80 percent of voting shares, effectively blocking any takeover, analysts believe hurdles preventing a takeover or even a joint venture will now start to ease. They argue that after Kraft and Cadbury join together, Hershey's main U.S. market will become more competitive and that Hershey as a pure confectionery player is more exposed to commodity costs like cocoa and sugar.
“We believe a deal for Hershey could be secured at around $10-11 billion plus a $2 billion debt take-out,” said analyst Deborah Aitken at brokers Bryan Garnier. This would put Hershey's price on a multiple of 14 times its underlying operating profit, or earnings before interest, tax, depreciation and amortization, compared to the Kraft-Cadbury deal agreed at 13 times EBITDA, Aitken added.
Kraft is expected to seal its recommended 11.6 billion pound ($18.7 billion) deal for Cadbury, with shareholders of the British group due to vote by February 2. The fact that Hershey had been actively trying to fund a bid for Cadbury, even if it ultimately failed, has also raised speculation about its future, as has the fact that 85 percent of its sales come from the U.S. market, where Kraft is likely to attack it with Cadbury products.
“We wonder whether investors begin to view Hershey as a potential seller at some point, rather than a buyer,” said analyst Andrew Lazar at Barclays Capital.
Nestle has plenty of firepower with $28 billion from the sale of its remaining stake in eyecare group Alcon. Nestle's CEO Paul Bulcke said in September that the group planned no major acquisitions in 2010, but then saw an opportunity to snap up Kraft's U.S. pizza business for $3.7 billion and may feel his next move should be to strike a deal with Hershey's CEO David West.
Belgium-born Bulcke took over as CEO in April 2008 after turning Nestle Americas into its biggest and most profitable region, so he will know all about Hershey's big lead over Nestle in the U.S. chocolate market.
When Nestle confirmed it would not make or participate in a formal offer, it sparked talk that the word “participate” meant it had been planning a joint bid with Hershey for Cadbury.
Nestle's confectionery unit has annual sales of 12.4 billion Swiss francs ($11.88 billion), accounting for 11 percent of group sales. Its underlying sales in the first nine months of 2009 rose four percent - not growing as fast as coffee and pet food but well ahead of bottled water, milk products and prepared meals.
In the chocolate world, Hershey is one deal Nestle could do without big anti-trust issues, and would have the advantage of getting back rights to some of its brands in the U.S. market. “For Nestle, Hershey is the deal it would like to do. It would have no major anti-trust problems, address its weakness in U.S. confectionery and get back its license to KitKat,” said an industry insider with knowledge of the situation.
When Nestle bought Rowntree in 1988, the British chocolate maker had already given up its U.S. rights to KitKat and Rolo to Hershey in the early 1970s, so the return of these brands would give a big boost to Nestle's U.S. confectionery business.
“We see Hershey as a superb fit into Nestle's portfolio, being able to boost Nestle U.S. chocolate market share to competitive levels,” Aitken said. She put Hershey's share at 30 percent, similar to Mars and both ahead of Nestle on six percent.
RBS analyst Julian Hardwick said there were big impediments to a number of rumored deals for Nestle.
- A purchase of baby food group Mead Johnson would bring anti-trust issues.
- Closer ties with General Mills, its partner in a breakfast cereal venture, are hampered by a standstill pact that extends to 2040.
- Nestle has 30 percent of the world's biggest cosmetics group, L'Oreal, but cannot raise its stake until six months after the death of Liliane Bettencourt, the daughter of the firm's founder and owner of a 31 percent stake, who is 87 years old.
