By Evie Liu
A potential tie-up between two snack giants -- Mondelez and Hershey -- could significantly reshape the industry. Wall Street is scrambling to assess the probability of the deal, and can't seem to reach a consensus.
Hershey shares shot up by 11% on Monday following reports that Mondelez had approached the chocolate maker about a potential takeover.
The deal, if it happens, would be one of the largest in the packaged-food sector in years and create a snack giant with sales of roughly $50 billion. In August, privately-held Mars already shook up the industry after it acquired Kellanova for nearly $36 billion.
Hershey boasts more than 90 confection brands, including the namesake Hershey chocolates and the famous Reese's Peanut Butter Cups. The majority of its sales comes from sweet snacks, and the firm mostly sells in the North American market.
The company is facing many headwinds today: Inflation-induced weaker demand has dented sales, while rising cocoa costs have squeezed margins. The spread of weight-management drugs that curtail appetite and shifting consumer preference toward low-sugar diets have further cut into sales.
Mondelez, the maker of Ritz, Oreo, and Toblerone, is in a better position. It has a more diverse product portfolio that also includes beverages and salty snacks. The company also has a large presence in international markets, where sales have been more resilient than those in the U.S.
Any attempt for a takeover would require the backing of the Hershey Trust, which holds nearly 30% of the company's shares and roughly 80% of voting rights. The trust uses the proceeds from its managed assets to provide education, housing, and care for children in need.
Hershey has been targeted for acquisition three times in the past 22 years, and the trust has always rejected the deal offers, including a previous attempt by Mondelez in 2016. Exane BNP Paribas analyst Max Gumport believes it's likely to block the deal again.
A "transformational" deal with Hershey also doesn't fit into Mondelez's core mergers and acquisitions strategy, says Gumport. Mondelez has been actively making acquisitions over the past few years, but those were mostly "bolt-on" deals with smaller firms whose products complement its own, such as energy-bar company Clif Bar and high-protein snack maker Grenade.
Mondelez has said that it wants to enhance the core categories of chocolate, biscuits, and baked snacks to 90% of its revenue over the next several years -- and Hershey could certainly help it achieve that.
Still, Gumport thinks this is an odd time for Mondelez to consider the move, given the challenged consumer environment and record-high cocoa prices. The analyst said he'd be surprised to see the deal go through.
Not everyone agrees. The Hershey Trust, holding mostly Hershey shares, might consider selling this time due to the stock's underperformance, wrote TD Cowen analyst Robert Moskow. Prior to Monday's gains, Hershey shares had dropped 14% over the past three months.
"In the past, the Hershey Trust has always elected to maintain control," wrote Moskow, "But today, the company is in a more vulnerable position, which we think could lead to a change of heart."
Whether the acquisition appears attractive to the trust would come down to the price Mondelez is willing to offer. Hershey's latest rally has pushed its market valuation to $39 billion.
"With Hershey shares trading at levels well below recent highs, we believe a meaningful premium to the current share price would be necessary to justify a sale," wrote Gumport.
From Mondelez' perspective, acquiring Hershey would address many of its issues all at once, said Moskow. The deal could not only bring cost synergies, but also enhance the firm's purchasing power in the cocoa market. This could help offset the rising costs of the commodity.
Mondelez' distribution network could help the Hershey brands expand internationally, especially in Europe, while Hershey could help Mondelez strengthen its access to the U.S. market.
"Mondelez is eyeing this potential acquisition as an opportunity to secure a top-tier brand at a discount, given Hershey's recent performance," wrote Randal Kenworthy, consumer and industrial products leader at consulting firm West Monroe.
Muzuho analyst John Baumgartner worries that Hershey's minimal international exposure won't bring enough cost synergies. Instead, Hershey could dilute Mondelez' revenue growth, he said, noting that chocolate consumption per capita in the U.S. has declined for much of the past decade.
Baumgartner is also skeptical whether the Hershey brands could scale overseas, since the company has already tried -- and failed -- multiple times over the years.
Write to Evie Liu at evie.liu@barrons.com
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December 10, 2024 13:45 ET (18:45 GMT)
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