There have been recent reports in the media that US chocolate-maker Hershey may be acquired by confectionery giant Mondelēz.
Neither company has commented on the reports, and similar potential deals have fallen through in the past.
Barclays has released a report that examines whether a deal is viable and what implications this could have for the broader sector.
The financial experts argue that Hershey would provide Mondelēz with a premier and high-margin confectionery business in the US, which is the most profitable chocolate geography in the world, and one in which Mondelēz currently has very limited exposure.
Unification Of Cadbury
According to Barclays, a prospective acquisition would also enable the unification of Cadbury globally, while improving the company’s domestic distribution network.
The report argues that the Hershey asset could represent an ‘appealing proposition’ to the company, though it may come at a cost.
‘While we understand the long-term strategic rationale behind Mondelēz’ interest in a Hershey takeover, we think the price point and consequent impact of the deal could have on the company’s leverage profile will go a long way in determining how investors would ultimately view this deal,’ noted Barclays.
‘We believe Mondelēz has significant white space opportunities globally for its current portfolio of brands and dramatically increasing exposure to chocolate in the slower growing US theatre could cause some skepticism among investors.’
Previous Stance
Barclays has also examined what may motivate the Hershey Trust to reconsider its previous stance on a potential takeover.
The Hershey Trust has 80% of voting control over Hershey, by virtue of its ownership of virtually all of the company’s Class B shares.
This means that any potential bid will need to be ratified by not only the Hershey board of directors, but by the fully independent Hershey Trust as well.
One factor that the chocolate-maker might consider is the impact that inflated cocoa costs could have on short-term profitability.
However, Barclays argues that elevated cocoa costs are only temporary, and the writers of the report do not think that this would represent enough of a reason, or change in dynamics, for the Hershey Trust to consider selling an asset that it has repeatedly refused to sell in the past.
Another factor that Barclays believes may potentially influence the Hershey Trust to make a deal is concern around broader health and wellness trends – and, more recently, the proliferation of GLP-1 weight loss drugs – as a long-term impediment to its business.
Finally, the report references Mars agreeing to acquire Kellanova and becoming a much larger, more integrated global snacking player.
Long-Term Sustainability
‘The Trust may have come to the realisation that operating as a standalone domestic chocolate manufacturer would not be sustainable longer term, and with no clear pathway to achieving global scale on its own, the Trust may view Mondelēz’ takeover as creating a broader portfolio of brands and geographies that could better withstand some of the structural headwinds,’ noted Barclays.
‘We also wonder whether some of the recent personnel changes in several high level roles at Hershey have been completed or whether there could well be some additional changes still to come that could well impact the Trust’s view on whether it believes the right broader team is currently in place at HSY to lead the company forward during this tumultuous time.’
