Hershey’s and Nestlé in running to buy Cadbury

By Louise Armitstead, Chief Business Correspondent

Published: 6:00AM BST 10 Sep 2009

In just a few days, the field has swollen to include the world’s biggest and
best-known brands in food and confectionary, each jostling for the prize of
a golden ticket into Cadbury’s
chocolate factory.

Kraft, based in Illinois in the US, said that buying the Birmingham-based
company would create a “global powerhouse” with annual revenue of
about $50bn (£30.2bn). It’s a prospect that has made almost all the food
companies stomachs’ rumble – and push-up Cadbury’s share price by 40pc.

Urging them on is a resurgent investment banking sector, for whom the chance
of such a tasty feast after a two-year deal-famine is just as appetising.

However, analysts say that there are few horses in the race that are really
worth backing. Kraft
remains the favourite with the most synergies. Next on
bookies’ list are two challengers: Hershey’s, America’s biggest chocalatier,
which is thought to already have JP Morgan on board, and Nestlé, the Swiss
giant – or a combined bid from them both.

This week Paul Bulcke, chief executive of Nestlé, said the company is “open
to acquisition opportunities if they fit strategically”. But the
company repeated its position that it only has a modest budget for M&A
activity in 2009 and 2010 and does not expect to make any major
acquisitions. However, the rare chance of clinching Cadbury, could prompt a
change of heart.

Nestlé has been smarting since last year when Mars bought Wrigleys for $23bn.
While the deal knocked Cadbury off the No 1 position in global
confectionary, Nestlé was shunted down to third. Worse, a Kraft-Cadbury
combination would seriously threaten Nestlé’s position in its own back yard.
Andrew Lazar, analyst at Barclays Capital, has argued that the combined
business would control 21pc of the fragmented market of western Europe and
be in a strong position to attract far more.

However, with a big overlap with Cadbury in the chocolate market, anti-trust
rules could present a stumbling block. Charles Mills, analyst at Credit
Suisse, said: “People focus on anti-trust issues in the UK but Nestlé
is usually Cadbury’s biggest competitor across the Commonwealth. To do a
deal, Nestlé needs someone else to take on chocolate, which is 46pc of
Cadbury’s sales, leaving Nestlé with a gum business, which it doesn’t have
at the moment.”

This is where Hershey’s could come in. The Pennsylvania-based company, which
failed to clinch a deal with Cadbury last year, faces a similar threat of
being shunted down the power-list of global confectioners. The firm’s
eponymous chocolate bar is also a national icon but its strong domestic
focus – 86pc of its revenue is generated in America – is now being seen as
its weakness. Cadbury’s chocolate business would be ideal for Hershey to
gain market share in Europe and emerging markets.

A note by Sanford C. Bernstein said: “Hershey’s focus on the US chocolate
market has left it somewhat ‘boxed in’, and we believe that expanding its
overseas presence might solve a major strategic obstacle.”

After several quarters of falling sales, there are signs that Hershey’s is
moving onto the front foot. The company’s sales grew 6pc in the second
quarter to $1.17bn while its net income soared. The company has also
announced an increase in its advertising spending by 46pc.

The problem for Hershey’s would be funding a bid for Cadbury. The company is
controlled by a multi-billion-dollar trust created by Milton Hershey, who
founded the chocolatier in 1894, which is fiercely protective of its 80pc
voting control.

But even without this constraint, Hershey’s, with $1.7bn in net debt and a
market value of $8.9bn, hardly has the financial firepower to takeover
Cadbury, whose inflated share price has sent its value soaring to £10.7bn.

Hershey’s could launch a joint bid with a private equity firm but this would
dramatically cut the number of cost synergies.

Which again brings back commentators to the argument that Hershey’s and Nestlé
should combined forces. It is argued that the chance of obtaining the
international presence it craves would be enough for the Hershey’s trust to
relinquish independence.

Nestlé is unlikely to have any qualms since it already has several joint
ventures in other parts of its empire. The question remains whether it has
the appetite.

Mr Mills of Credit Suisse said: “It’s not obvious that Nestlé wants gum
or candy since it hasn’t converted any of the opportunities so far.”

He adds: “But the problems are never impossible and, with the number one
company in their sector in play, both Hershey’s and Nestlé should look
definitely look at Cadbury.”

Well-known brands on the table

Nestlé:

Chocolate brands include: Smarties, Aero, KitKat.

Could buy Cadbury’s chewing gum, including Trident and Cadbury’s sweets
including Bassett’s, Halls, Trebor.

Hershey’s:

Chocolate brands include: Hershey’s Bar, Hershey’s Kisses, Reese’s Peanut
Butter Cups.

Could buy Cadbury’s chocolate business, including Dairy Milk, Flake, Creme Egg.