Money Matters, Simplified.
Hershey still undecided about Cadbury bid
by Jamie Anderson - January 6, 2010 - comments
While Hershey, one of the oldest chocolate manufacturing companies in the United States, is still not sure whether to bid for Cadbury or not, Kraft said it would boost the cash portion of its offer for the UK confectioner.
Harrisburg, PA, January 6 -- The members at the helm of affairs at Hershey Co. (NYSE: HSY) could not reach a unanimous decision as to whether the company should make a bid for Cadbury Plc (LSE: CBRY, NYSE: CBY) or not.
The exact details of the discussions were not divulged as the talks are being termed as private.
According to the sources close to the matter, Hershey’s controlling trust, led by former Pennsylvania Attorney General Leroy Zimmerman, intend to go ahead with the deal, while Chief Executive Officer David West is not game for it.
Financing issue
If Hershey, the largest chocolate manufacturer in North America, makes a bid for the English confectionery and beverage behemoth, it would have to compete with Northfield, Illinois-based Kraft Foods Inc.’s $17 billion hostile bid.
Hershey surely would want to avoid the bidding war with Kraft given its relatively weaker financial muscle.
Furthermore, Cadbury is twice the Hershey’s size. Financing such a huge acquisition may necessitate the sale of Hershey’s assets such as the U.S. rights to the Kit Kat and Rolo brands.
Roy Behren, an analyst at Westchester Capital Management in Valhalla, New York said, “A bid does make a lot of sense but they would have to incur some debt. I don’t know to what extent they’re willing to risk the investment grade credit rating.”
The options before Hershey
Nestlé's (SIX: NESN) withdrawal from the bidding process for Cadbury is likely to make the entire bidding process for Hershey thornier. Under the present circumstances, the latter cannot ask the Swiss food behemoth to help it in funding an offer for Cadbury.
Should Hershey decide to do it on its own, it would bring up the combined companies' balance sheet to leveraged buy-out levels. If Hershey issues shares to raise capital and fund the takeover, it could dilute the stakes of its controlling trust and other shareholders drastically.
However, Hershey can connive with Ferrero, as the Italian confectioner has also been contemplating the possibility of joining the race for Cadbury, either on its own or with a partner.
JPMorgan Chase & Co. and Bank of America Corp. are also ready to provide billions of dollars in loans for the deal. Hershey claims that it would not like to team up with private-equity firms.