Nestle - Overweight PT : CHF88
In the wake of Mondelez’s attempt to acquire Hershey (please refer to our US colleague Ken Goldman’s note),
we analyse the potential read across for Nestle. Note that the Hershey board yesterday rejected Mondelez’s
offer. The return of the KitKat license could be c1% accretive for Nestle, in our view, while we do not see it as a
priority for Nestlé to chase a USD23bn confectionery deal hence we ascribe limited probability it will enter the
race to acquire Hershey. In our Nestle model, published on tab “NESN-HSY_model”, we provide a deal model
to allow investors to play along with various assumptions on potential transactions as well as global market
share in confectionary. Contact your J.P. Morgan representative, or reply to this email for a copy.
* The KitKat license in play. Hershey owns the US right to the KitKat brand. Our colleague estimates sales of
US$542m and EBITDA US$179m in 2015 and believes the Kit Kat license would revert back to Rowntree
(now Nestle) with no payment from either party, according to the 1979 agreement between Hershey and
Rowntree (then owner of KitKat). While it is unclear to us whether the original agreement was modified or
would hold under any deal structuring, we believe the accretion for Nestle would be 0.6% to1.0% (assuming
US$2.5bn to zero payment).
* Confectionery remains an ambiguity within Nestle’s portfolio. Nestle derives c10% of its sales from
Confectionery. In our report Nestle 2.0, we argued that the division seems less of a fit within Nestle’s strategy
while it is also disadvantaged on a global basis: ‘Nestlé’s long-term commitment to confectionery within its
“Health & Wellness” strategy remains a question mark, in our view, given the long-term risks of a consumer
backlash against unhealthy foods as Soft drinks and Cereals are experiencing. Besides, our analysis shows the
division is still very much in a 'double or quit' box, as we do not see an organic solution to address Nestlé's
lack of scale and brand equity in WE and NA confectionery’.
* Hence, it is unclear if Nestle would chase Hershey as a target. Balancing the pros and cons, we do not
think an outright US$23bn acquisition of Hershey would be a priority. On the Pros side: 1) Nestle would build
scale in NA, 2) this could help streamline the US portfolio by speeding up the disposals of Frozen Foods and
Ice cream, 3) Hershey chocolate brands could flourish outside the US thanks to Nestle global platform
(Hershey derives only 15% of sales outside the US). On the Cons side: 1) we see most potential globally for
premium chocolate and Hershey brand positioning may not totally fit the bill, 2) Nestle is in the midst of a
management change and timing may not be ideal, 3) there will be some small antitrust issues in the US
confectionery, 4) while Nestle sought to buy Hershey in 20021, we do not believe it showed interest in the
subsequent consolidation of the global confectionery market (Mars bought Wrigley in 2008 and Mondelez
bought Cadbury in 2009), hence raising doubt that a potential US$23bn deal in confectionery would now be a
priority, 5) we rather see substantial value-creation in a potential JV, which may be difficult to enact with
Hershey (we had exposed the value-creation in a potential merger of Nestlé confectionery with Ferrero in
Nestle 2.0).