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Kraft Gets Cadbury; Should Hershey Watch Its Back?


Sweet Deal for Cadbury

After a four-month pursuit that occasionally got testy, Kraft Foods (KFT) has finally got its prize. British candy maker Cadbury PLC (CBY) has agreed to be acquired by Kraft for about $19.5 billion. In its announcement of the agreement, Kraft noted that the deal “will provide the potential for meaningful cost savings and revenue synergies” that will benefit current Cadbury shareholders.

One thing for sure is that Kraft will be the world’s largest chocolate maker if the deal goes through. There is still a chance that the Hershey Company (HSY) may jump in with a counter offer before Monday’s 7 a.m. deadline. But Hershey may also want to watch its back, because the Kraft-Cadbury deal could turn loose a suitor or two for Hershey itself.

If Hershey is going to continue its pursuit of Cadbury, it will need serious help. The company’s balance sheet makes a stand-alone offer for Cadbury very iffy. Swiss chocolate maker Nestle could make a counter offer for Cadbury, but it might make more sense for Nestle to have a go at Hershey.

Hershey’s market cap is right around $8.25 billion. As of December 2008, Nestle had cash on hand of nearly $6 billion and a total asset value of more than $100 billion. That kind of money would seem to have made Nestle a player in the chase for Cadbury, but there are apparently some anti-trust issues in such a deal.

Why would Nestle want to purchase Hershey anyway? The confectionery business has been consolidating for a while now, and no one wants to be left behind. Nestle, in fact, just helped Kraft with the Cadbury deal by buying Kraft’s frozen pizza business for about $3.7 billion in cash.

Hershey shares are rising this morning, up about 3% in the first half hour of trading. That rise is surely based on the belief that Hershey will not, repeat not, attempt to make a counter offer for Cadbury. Instead, the price rise indicates that traders believe Hershey will be the next candy company to be swallowed up by a bigger rival.

Hershey’s unique organization structure, where the Hershey Trust owns a third of Hershey’s shares but controls 80% of shareholder votes, does not lend itself to partnering with buyout groups that typically want more control than Hershey will give up. But the trust, through its control of votes, can essentially accept a buyout offer on its own.

Can Nestle make Hershey an offer it can’t refuse? In theory, yes, but the Hershey Trust would really have to love the deal.

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