Mondelez/Hershey: bitter and sweet
How much longer can Hershey defy the march of time? The confectioner is an anachronism. It is headquartered in rural Pennsylvania. Despite a $21bn market capitalisation, is controlled by a family trust. It is decidedly non-global; 85 per cent of its revenue comes from North America. On Thursday, snack juggernaut Mondelez — Oreo cookies, Trident gum — made a bid for Hershey. If not for its idiosyncrasies, Hershey would have been gobbled up long ago. But times change, and this may be Hershey’s moment to catch up.
Mondelez is everything that Hershey is not. Despite a Chicago headquarters, just a quarter of its business is in the US. It has made deep inroads in emerging markets. Its board is thoroughly modern and features respected activist, Nelson Peltz. Mr Peltz harboured ambitions of combining Mondelez with Pepsi’s snack business. Until now boss Irene Rosenfeld has had to eschew any big deals and slash costs instead (Hershey’s 20 per cent operating margin remains superior to Mondelez’s). In the last two years Mondelez shares are up a tenth, ahead of the broader market and Hershey, which has moved sideways.
With an enterprise value of $80bn, Mondelez has plenty of firepower. Half the $23bn consideration is reported to be offered in shares. Mondelez sports a price/earnings ratio of 21 times; Hershey’s multiple at the deal price will be higher, but with cheap debt readily available expect the bidding and the valuation to escalate, likely with multiple suitors.
This, however, assumes that Hershey is ready to change. Nearly 15 years ago it backed out of a deal to sell itself to Wrigley. A few years back it opted against chasing Cadbury. Instead, Mondelez (then Kraft) controversially snatched the UK food group (oddly enough, Hershey licenses the Cadbury name in the US). Mondelez consolidated Cadbury in a ruthlessly efficient way. This may give Hershey pause; or it may shed its provinciality, and go for the money.