On the heels of a hostile $16.4 billion bid for British candy maker, Cadbury PLC (CBY) , by U.S. based Kraft Foods (KFT), The Hershey Company (HSY) is said to be mulling over its own potential offer. Taking on the purchase of Cadbury, twice its size, could prove difficult for this chocolatier, however, as the probable $17 billion price tag would likely stretch Hershey’s balance sheet materially. While the credit markets have loosened somewhat, financing would be an issue. Hershey would likely need a combination of options, such as issuing both debt and equity, which would pressure earnings due to a high interest expense load and a dilutive share count. Partnering with another competitor, such as Italy’s family controlled Ferrero SPA, which is said to be considering entering the Cadbury purchase fray, is another possibility. But a joint purchase would add a layer of complication, with decisions necessary for the successful dissection of Cadbury’s brand divisions and earnings at stake. Switzerland based giant, Nestle (NSRGY.PK) is another contender likely to throw its hat in the ring. Financing would not be a problem for this food behemoth, but the European Union may have something to say about the takeover due to anti-trust concerns.
Previous growth opportunities through acquisitions have passed Hershey by, limited by the Hershey Trust, which holds 79% of the voting stock. This controlling board of trustees manages the Milton School, an educational institution serving children in need, established by Hershey founder, Milton Hershey . A large portion of the school’s endowment consists of Hershey stock, but as the stock price has drifted downward since 2005, a more progressive stance is being contemplated. It was the board that dashed a $12.5 billion sale to Wrigley Corp. in 2002, and a more recent attempt to merge with Cadbury in 2008. But the trustees are beginning to change their tune in order to enhance long-term prospects for the confectioner and boost the sagging stock quotation thanks to several new directors on the board.
Of late, product launches have taken a backseat to economic challenges. In years past, Hershey would unveil upwards of 200 new candy creations a year, compared to this year’s effort of about 50 new items. Research and development costs total just 0.5% of sales and would do well with an injection of funds and product pipeline activity to spur new products and appeal to the whim of fickle consumers, through new flavor combinations or eye-catching packaging.
The purchase of Cadbury would greatly enhance Hershey’s product line up as well as markedly extend its geographic reach. While these are admirable goals, there is reason to be leery of the financial toll placed upon Hershey and the probable lengthy integration process. No doubt, Hershey needs to pursue viable avenues of growth, both internally and via acquisitions, in order to bolster both the top and bottom lines over the long term. However, a Cadbury purchase may yet lead Hershey to bite off more than the company can chew - at least in the short term.