HSY Stock: For the Right Price, Hershey Co Should Sell

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On June 30, the board of Mondelez International Inc (NASDAQ:MDLZ) sent a letter to Hershey Co’s (NYSE:HSY) board proposing it acquire the Pennsylvania chocolate maker for $23 billion, half of the $107 per share offer in cash, the other half in stock.

HSY Stock: For the Right Price, Hershey Co Should Sell

Hershey’s board unanimously rejected Mondelez’s offer, even after the maker of Cadbury chocolate bars proposed renaming the merged company Hershey and moving its head office to Pennsylvania from Illinois.

Not enough of an incentive to sway its controlling shareholder, the Hershey Trust Company, which holds an economic interest of 34.1% along with 81.4% of the votes. The dual-class structure has once again come squarely home to roost.

The Hershey Trust Company has historically been opposed to any sale of Hersey to outside interests. As trustee for the Milton Hershey School Trust, The M.S. Hershey Foundation Trust and the Hershey Cemetery Trust, it has been entrusted with the financial oversight of the Milton Hershey School since 1909.

Milton Hershey funded the trust company, which now ensures almost 2,000 students pre-kindergarten through grade 12 from low-income homes are able to receive a quality education at no cost to the family. It’s a godsend for those who make the cut.

So, as you can imagine, the trust has an incredibly important obligation to current students, future students, the company itself and even the town of Hershey. To willy-nilly agree to Mondelez’s offer would be tantamount to negligence, although I’m not a lawyer, so I can’t completely understand where the line is drawn in such a situation.

Suffice it to say, we’ve been down this rabbit hole before.

Hershey’s Previous Offers

In September 2002, Wrigley, now owned by Mars, offered to buy Hershey for $12.5 billion in cash and stock, but at the last hour, 10 of the trust company’s 17 board members voted to end the auction, which had been set up earlier in the year to find a buyer.

At the time, the trust reasoned that it needed a sale in order to diversify its interests beyond its controlling stake in Hershey. Pennsylvania’s Attorney General at the time applied legal and political pressure to the situation; ultimately, that tactic along with community protests ended the move to sell and here we sit today.

What will it take for the Hershey Trust Company to relent? A heck of a lot more than $107 per share.

In 2002, Hershey generated $403.6 million in net profit on $4.1 billion in revenue. That’s a multiple of 30 times earnings and three times sales. Based on 2015 numbers, Mondelez proposes paying 44.4 times earnings and three times sales. However, if you back out the $281 million in impairment charges in fiscal 2015, the multiple drops to 28.7 times earnings, less than what was offered by Wrigley 14 years earlier.

A lot has changed since then.

Surely, Hershey’s value in the chocolate space has gone up, not down, as time has passed. Not to mention, you have to pay a premium when someone controls the votes.

Bottom Line on HSY Stock

No, for me it’s as simple as increasing the offer by 50% to $160 per share. At that price, the trustees are doing a great thing for the school because quite rightly, diversification on the scale of a pension fund is what’s needed to ensure the school’s future financial health. It thought it was appropriate a decade ago. Nothing on that score has changed.

And heck, if the trust wants, it can always keep the stock portion of the deal for sentimental reasons.

But alas, this is all conjecture until Mondelez or someone else steps up to the plate. Batter up?

As of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.

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Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia.


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