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Boring food company stocks have become among the tastiest stocks in 2016. It’s easy to see why.
People always need to eat. So these companies will have steady revenues, even in a recession.
Added to that is the fact that these companies offer dividends often in the 2%-3% range and sometimes higher. That looks fantastic in a world of negative interest rates.
And now we have the food sector being inundated with takeover talk. Names like Kellogg (NYSE: K) keep getting bandied about as targets by suitors.
And of course, there is a definite offer on the table for Hershey (NYSE: HSY) from Mondelez International (NASDAQ: MDLZ). So far, Hershey has rejected the offer.
Mondelez Offer Totaled $23 Billion
Mondelez’s cash and stock offer for Hershey was worth $107 a share or about $23 billion.
If consumated, the deal would create a company – called Hershey – with combined sales of $37 billion. The combination would bring together well-known brands including Oreo cookies and Cadbury to the Hershey name.
It would also create the world’s largest candy company, with 18% of the global candy market. And the new Hershey would control 3% of the world’s packaged food market.
Source: Financial Times
It is interesting to note that, despite the rejection, Hershey stock is still trading above the offer price, at around $111 a share.
That’s likely due to the fact that both companies’ sales are under pressure. Both management groups need to do something.
Changing consumer tastes in the U.S. are hurting Hershey. While it’s rumored that Mondelez will become the next target of the 3G-led Kraft-Heinz (NASDAQ: KHC).
Another item keeping Hershey takeover hopes alive is the form Hershey’s rejection took. The company said the offer “provided no basis for further discussion.” That seemed to leave the door open that a higher bid from Mondelez would be acceptable.
The Trouble With Hershey Trust
Many doubt Hershey will ever be sold, thanks to the Hershey Trust, which controls 81% of the voting rights of Hershey stock. The Trust was set up by founder Milton Hershey and its primary beneficiary is the Milton Hershey School for underprivileged children in Hershey, Pennsylvania.
The Hershey Trust has always opposed any takeover, such as the offers over a decade ago from Wm. Wrigley and a joint one from an independent Cadbury and Nestle SA (OTC: NSRGY).
But the Hershey Trust’s Board of Directors is not what it used to be.
The Hershey Trust Board is under investigation from the office of the Pennsylvania Attorney General. The investigation involves overpayment of directors, lavish expenses and alleged conflicts of interest. Nearly half the board was forced to resign and many other members are under pressure to do so.
Some newer members of the board have Wall Street backgrounds and are pushing the Hershey Trust to diversify. The Trust has about two-thirds of its endowment tied up in Hershey stock. More diversification seems to open the door to a possible sale of Hershey.
But any deal would still need the nod of approval from the Pennsylvania Attorney General, which oversees the Hershey Trust. Any approval there would have to wait until after the November election. The attorney general – Kathleen Kane – is under investigation herself for ethics violations and will be out the door when a new attorney general is elected.
Any new attorney general will want ironclad agreements from any buyer to not move the company and pretty much leave everything as it is in Hershey, Pennsylvania.
A Higher Price for Hershey Stock?
That means the odds are still stacked against any deal. But it is possible.
Hershey needs to move into the 21st Century to survive. Hershey stock – before the offer – has done little for the past three years.
It needs international exposure – 85% of its revenues comes from North America. Mondelez, through Cadbury, will gain Hershey that exposure particularly to emerging markets.
A higher price for Hershey stock, of around $120 a share, may tempt Hershey to finally say yes. But that could open the door to others like Nestle or several packaged food companies to join in to a bidding war. Hopefully, that will please both the Hershey Trust and the future Pennsylvania Attorney General.