Q&A: Could Hershey Trust be amenable to Mondelez deal?
It started with a kiss — a Hershey’s Kiss. And from there the eponymous company grew into one of the world’s best-known manufacturers of chocolate. But founder Milton Hershey did not leave a legacy based only on confectionery.
The entrepreneur-cum-philanthropist built an entire town — also called Hershey — for his factory employees and most importantly, a school for underprivileged children. The Hershey Trust Company is the trustee of the school and administers the funds dedicated to it.
More than a century on, Mondelez, rival snack maker and owner of Cadbury’s, is attempting to buy Hershey, bringing the trust and its operations into sharp focus.
With 81 per cent of the Hershey company’s voting rights, the trust will play a pivotal role in deciding whether to embrace Mondelez’s advances. The group has rebuffed one proposal but analysts are betting a higher offer is to come.
But the international attention garnered by Mondelez’s courtship has shone a spotlight on an organisation in upheaval, which some speculate may render the trust more willing to sell than in the past.
When and why was the Hershey Trust established?
Milton Hershey and his wife Catherine set up the trust in 1905, not long after the businessman built his first chocolate factory near Derry Church, Pennsylvania. The trust initially functioned as a bank for the community. But when the Hersheys established the Hershey Industrial School for orphaned boys in 1909, the trust was appointed control of its finances.
The deed outlined the Hershey’s wishes to ensure that the school, now called Milton Hershey School and expanded to include underprivileged girls, would have access to sustainable financial resources in perpetuity. In 1918 Hershey bequeathed the trust his chocolate group and all the auxiliary companies he had also started to handle the supply chain including his then Cuban investments, the town’s utilities and department store among others.
How is it organised, who is in charge and what are its objectives?
The Hershey Trust has $12bn in assets, double from a decade ago, putting it among the largest educational endowments in the US.
Through the ownership of Class B shares the trust controls about 80 per cent of the company’s voting rights. It also owns roughly 8 per cent of the group’s common shares and three of its directors sit on the Hershey company’s board.
In addition to the Milton Hershey school, the trust also serves as a trustee to the MS Hershey Foundation Trust, which supports the local park and museum, and the Hershey Cemetery Trust. It is served by 10 directors. The trust is supervised by the Pennsylvania attorney-general’s office, which has to sign off on any sale of its controlling stake.
Has Hershey received a takeover offer before?
Yes. In 2002, in an effort to diversify its portfolio, the trust put the Hershey company up for auction. It received two bids, one from Wrigley (since bought by Mars) and a joint offer from Nestlé and Cadbury Schweppes.
Wrigley’s $12.5bn bid, had — similar to Mondelez’s offer last week — been packaged with pledges to retain jobs. But that did not allay the local community’s fears.
The state attorney-general’s office blocked the deal on grounds that it would harm the community. A court backed this decision and the trust abandoned the plan. New rules were put in place to make it more difficult to sell the company.
Hershey and Cadbury executives had also reportedly flirted with a combination in 2007, but it was ultimately thwarted because of a tussle between the trust and the company’s board. Mondelez now owns Cadbury.
Jonathan Klick, a professor at the University of Pennsylvania Law School, writing in a paper about the deal estimated that rather than improving the welfare of the school’s students, who are the main beneficiaries of the trust, the court’s decision to stymie the deal had destroyed $2.7bn in shareholder value.
Why has the attorney-general’s office raised concerns over the trust?
The state attorney-general’s office is scrutinising the organisation over issues including alleged overpayment of directors, conflicts of interest and expenses. It is also seeking the resignation of three longstanding board members.
The trust said that policies regarding pay, travel and expenses were being “scrupulously followed”. The boards meet regularly to conduct proper oversight of the trust and the school, it said.
“We expect to appropriately resolve outstanding concerns the attorney-general’s office has,” it said. “The boards believe they continue to be in regulatory compliance and continue to have appropriate discussions with the attorney-general’s office.”
The attorney-general’s office did not respond to several requests for comment.
In April, the trust fired John Estey, an executive vice-president, after he entered into a plea agreement with the US attorney’s office in Harrisburg, Pennsylvania, to one count of wire fraud. Mr Estey’s wrongdoing was unrelated to the trust, it said.
The fresh concerns come a couple of years after a two-year investigation into the trust by the attorney-general’s office resulted in an agreement stipulating new rules on pay, expenses, property transactions and conflicts of interest. The office, which had reportedly been concerned over the trust’s purchase of a golf course, did not find that it had breached its fiduciary duty.
How are the overtures from Mondelez expected to play out?
Given the upheaval at the trust and the potential for three new board members on top of three others appointed earlier this year, some analysts say there is a chance that the trust could be more amenable to a sale of the confectioner.
Also while Hershey is a key employer in the area, it closed the original chocolate factory in 2013 it consolidated production and shifted some manufacturing to Mexico.
Others, however, are less certain. Prof Klick said: “It is politically difficult since the central Pennsylvania voters do not want to see Hershey controlled by outsiders.”