Mondelez International Makes Bid To Acquire The Hershey Company

Been waiting patiently - even more so with the rumors of another Nestle takeover bid earlier this month and the spike from that rumor - and it looks like I'll be waiting patiently for even longer.

I agree that a takeover by Mondelez with Rosenfeld at the helm would be an American business tragedy. Hopefully the Trust is thinking things through rationally and logically.

When I saw the news the first thing I thought of was your blog post from a few years back talking about Irene Rosenfeld. It's really too bad that these quality products are being sought out by thoughtless empire-builders. I (unfortunately) don't have a position in HSY but am also hoping that the deal does not go through.

I was pretty upset when I saw this in the morning. I was planning on holding my HSY forever. If this goes through I will not be taking MDLZ shares. I will promptly sell and redeploy the capital.

If only there was another great company to hold for the long term trading at an attracTIF value...

That would be exactly my plan should a company like MDLZ acquire HSY.

Hi Joshua,
about a potential Nestle counter-offer, from the WSJ:
"For one thing, the bid could cause others who have long coveted the iconic company to come out of the woodwork. Nestlé SA is one possibility. The Swiss food giant already licenses the KitKat brand to Hershey in the U.S. Nestlé has the right to reclaim control of the chocolate-covered wafer treat if someone else buys Hershey—at no cost, which could diminish Hershey’s value to Mondelez by $3 billion, according to a person familiar with the matter. Nestlé could have greater antitrust issues in the U.S. if it were to try to buy Hershey, however."

I have a soft spot for these bizarre situations and weird quirks because I like knowing the history behind and about certain deals, brands, etc. Hershey is a treasure trove of them. One of the things that is particularly fascinating is that Hershey is a case in which the price at which it would be rational for a seller to accept in giving up his or her ownership is not the same price at which a buyer would necessarily be rational paying. There exists a gap - a differential between those two prices - that requires some sort of irrational or sub-optimality for one party to cross in order to consummate a deal. This is especially true when you factor in the long-term holding period of many Hershey stockholders resulting in highly appreciated deferred taxes (which could be mitigated in an all equity deal but not in an all-or-partial cash deal) and the potential loss of revenue and profit from things like Kit Kat. Nestle, in other words, can earn the same return by paying a higher price, giving it an advantage over other businesses in a bidding war. This is fascinating because there exists two sets of intrinsic values - the intrinsic value for the buy-and-hold multi-generational owner of Hershey and the intrinsic value for a potential acquirer, the latter of which is different for each firm based on their own inputs. What is unique about Hershey is that gap is not inconsequential.

Personally, I hope the whole thing goes away entirely. I don't want Hershey bought at any price or on any terms. Although there exists some completely ridiculous figure at which I'd have to surrender my equity willingly - something on par with certain valuations in the late 1990s that no sane person would pay unless the participants of the capital markets had completely lost their mind and equity and debt financing was abundant, which I put somewhere between $230 and $270 per share by my back-of-the-envelope calculations - I'm really not interested in giving it up to anyone else because there aren't a lot of comparably excellent assets in the world. Hershey is one of those rare firms that serves as a sort of central pillar of a portfolio. Even if it were to lose 75% of its market value, like in a 1973-1974 scenario, the core economic engine should still be fine, pumping out dividends and funding share repurchases. As far as common equity is concerned, it's one of the few things that, when put in a diversified portfolio, can serve as a storm shelter to which a person can run knowing that no matter how badly it looks, it should turn out alright (though, again, there are no guarantees in life - folks in Austria didn't expect a complete wipeout of the entire equity market due to the rise of Hitler in the 20th century).

The trick would be running the trust. In theory, were I the trustee of Hershey, I feel as if my fiduciary duty would at least require a serious consideration of an offer anywhere north of $130 per share and most definitely between $140 and $150 per share. I don't think a lot of companies would be willing to pay that because, again, there is a differential in intrinsic value depending upon which side of the table you sit in this deal. Hershey is worth more to an existing owner on a long-term basis if it remains independent. It's going to take a lot to breach that threshold. Someone is going to have to really want it.

But, in truth, as a non-trustee, I'd probably vote against even a Berkshire Hathaway acquisition at $150 a share. I could live with it if it were consummated on an all-stock basis but I wouldn't be thrilled about it. Not that it would matter. There is only one vote that matters in this situation at it is the Hershey Trust. The rest of us are along for the ride, which is what I mean when I say it is, in many ways, akin to investing in a private business.

Thanks so much for this. I appreciate your insight, especially because most articles I've read make no mention of Mrs. Rosenfield. How long do you think this will take to play out?

PS. I would love to read an article on the last takeover attempt.

Hershey just rejected the $107 (50% cash/50% Mondelez) stock bid moments ago.

http://www.cnbc.com/2016/06/30/hershey-shares-pop-7-on-report-of-mondelez-takeover-bid.html

Not surprising, didn't even make it to the Trust to reject, BOD unanimously rejects.

The amount and terms offered by Mondelez seemed like a stink bid in my opinion.

I don't understand what the logic could be here???

Logic being Rosenfeld is a terrible CEO? 😉

The company seems like a perfect fit for Berkshire. Why wouldn't Buffett just buy Hershey and leave everything the way it is so the Trust can continue Milton Hershey's mission ad infinitum? I agree about Ms. Rosenfeld. All the Trust has to do is look at the promises she made to the Cadbury folks and what has occurred since then.

The deal is awful for Hershey as MDLZ is using an overvalued currency (my opinion) to finance 50% of the deal.

I can think of only a handful of companies that have the culture and ability to keep Hershey running in its present manner were it to be acquired. Berkshire Hathaway in the United States is one of them. Nestlé or Chocoladefabriken Lindt & Sprüngli, both in Switzerland, are the other two. I wouldn't want to sell out to any of them as I think Hershey should remain independent. Nevertheless, each would have its own advantages and drawbacks. At present, if you forced me to choose - and you'd have to give me time to think about this as I could change my mind tomorrow but right now, in this moment - I'd be happiest with an all-stock acquisition offer from Berkshire following the old PG/Gillette model of subsequent cash flow being used to buy back shares to offset the dilution so you get the best of both worlds in terms tax efficiency vs. effect on long-term earnings. It'd have to be above $140 per share, though, and the Kit Kat rights would have to be retained. I don't see it as likely.

The funny thing is, Hershey demonstrates that all of this moving of chairs isn't necessary. The nature of the trust has required it to focus on what it does best for year after year, decade after decade, generation after generation. In doing so, it has been forced to produce returns from actual sales and earnings. Owners have been richly rewarded as a result. Absent some low-probability event, I imagine that 25 or 50 years from now, a shareholder buying today, at this price, would still be happy he or she had acquired the stock even if it did nothing or fell by 30% over the next 5 years. I mean, if you told me tonight that I was going to go into a coma for 30 years and had to liquidate my entire net worth and invest it in 30 companies that could not be changed until I woke up, Hershey, even at $111 per share, would be on the list. Most investors don't have that kind of time frame nor are they emotionally able or willing to deal with the fluctuations that result, such as Hershey losing 50% of its quoted market value between 2005 and 2009 despite its sales and earnings getting stronger over that same span.

I don't think Mondelez exists in its present form for long. I can't see it being around in 10 or 20 years in its present form. I'm not sure what happens but I'd bet someone smarter and better is going to come along and either break it up or acquire it in whole before shedding certain brands. Its whole existence is a demonstration of why I think Irene Rosenfeld is so terrible at her job. It was born out of folly and remains the walking, talking manifestation of the old Peter Lynch rule: "Buy a business so good that an idiot could run it because, sooner or later, one will." Her career is one carried on the back of generations of brand equity built up by her betters before her; brands so good they continue to produce cash despite all of her screwups, all of her stupid decisions, and all of her shuffling pieces. Had she decided to work in a different industry, such as steel, we'd have never even heard of her because she'd have been in disrepute a lot sooner. It's amazing how many sins an incredible economic engine can hide.

In the packaged food industry, I think of Irene Rosenfeld as sort of the anti- Indra Nooyi at Pepsi. Although the family doesn't hold a meaningful amount of PepsiCo (something we'd like to change in the future), I adore Mrs. Nooyi. She gets it. Sometimes, you have to focus on long-term brand equity over profits, putting pieces in place that will pay off long after you're gone. Through one of the most challenging economic and capital market decades in American history, she's protected the brands under her stewardship, she's maintained an emphasis on healthy dividend growth for owners and responsible share repurchases, and she's avoided making dumb deals. Sure, the management under her makes occasional mistakes such as consumers being unhappy with the taste of Diet Pepsi after the removal of aspartame - but she is humble and immediately recognizes when she's made an error, correcting it. She understands perception and morality, taking responsibility when she failed to do something (the handling of the water usage issue in India is particularly interesting as a case study). I'd love to see her eventually get her hands on the Mondelez assets.

I realize that you write about more or less the same companies all the time, but is this acquire-before-coma list public? Thanks!

I'd assume at least a quarter of them are the ones he talks about.

I find it very strange that the stock is still trading over $112 after a lowball of $107. People think someone else is going to throw in another offer?

Yes, that's what I think most people are thinking right now. There were rumors not long ago that Nestle was considering a bid. Now we have a confirmed offer for the company from Mondelez, even if it is a lowball offer. A lot of people think HSY is in play right now and this bid, although flatly and rightly rejected, could spark a bidding war.

There has been some turmoil at the Hershey Trust, with the Pennsylvania Attorney General looking to remove three members of the trust's board, and I think some on Wall Street and perhaps in boardrooms are seeing the disarray at the trust as an opportunity to possibly get a takeover bid through.

Okay, I can see that... but how could either Nestle or Mondelez get over the anti-trust issues even if they could get through the board and the trust? Would Berkshire pay $130 a share?

From everything I've read, there seem to be fewer anti-trust concerns with Mondelez than Nestle, but I'm not by any means expert in anti-trust issues. Also, those may not be the only potential buyers. There may be a few other packaged food giants at least taking a look at Hershey.

Hershey rejected a $107 offer, but the stock keeps trading at $114. That's.... odd. I hoped Hershey would reject and the stock would plummet to sub $80 so I could buy more. Sad face.

It's funny how these things go in cycles. I mentioned earlier how you had a 2005-2009 period where Hershey, the business, was doing just fine but the stock slowly meandered its way down to a 50% drop on paper as everyone neglected it. Ben Graham used to opine that if you are patient, and wait long enough, you'll usually get your price. There are a handful of really great companies right now that you couldn't dream of owning on a rational basis back in 1999 but that are, in my opinion, reasonably undervalued for a long-term owner. (Considering bargains are not exactly abundant at the moment, I find it particularly interesting.)

It's one of the reasons I laugh at hard forms of the efficient market theory. People eat this stuff up but capital markets, driven by individual investors or decision makers at institutions (even high frequency trading is still ultimately influenced by the algorithms humans write) are just as subject to the winds of fashion as haute couture in Paris. I suppose you could say a lot of what I (and many people in this community) do could be considered arbitraging time and other peoples' emotions.

Man, it's like jumping into season 6 of Game of Thrones trying to work out these companies' histories. Here's a quick recap for anyone else not as familiar with these characters... http://blogs.wsj.com/moneybeat/2015/08/06/mondelez-and-kraft-a-storied-history/

I'd love to hear your thoughts on KHC. I'm long at a sub $70 price.

Personally, I love KHC. I think it's a great company with very solid management and something you could hold on to for a lifetime. My opinion is that they will make another acquisition in the next year or two as they continue to clean up their balance sheet. They are beginning to achieve synergies in the merger and have a strong 5+ year plan set out to achieve synergies and grow the business. Looks like you bought in at a good price, so whether you plan on holding for a year or five years, you will be getting some very solid returns (in my opinion).

I usually don't talk about individual stocks unless they are 1.) enormous blue chips with lots of liquidity nearly everybody owns, even if through an index fund and/or 2.) there's something that highlights a particularly interesting academic point but in this case, I think the first applies enough that I'm comfortable talking casually about it. We're on the verge of me not being able to have conversations like this, anyway.

There's quite a bit of Kraft Heinz in some of my family member's accounts from a legacy position I established for them prior to the merger. In one case, I opted to use the special dividend to build their Colgate-Palmolive stake for personal reasons I explained here but the shares that were received still sit there with no plans in the foreseeable future to sell them. Although I don't consider the present valuation particularly compelling, I do think that it is a wonderful company with some terrific brands, significant advantages, and an ownership structure that very well could allow it to become the Berkshire Hathaway of the food industry as it has two very interested long-term controlling owners who are willing to provide it with enormous sums of capital to do deals that make sense. Aaron and I indirectly own it through our Berkshire Hathaway stake so we're interested in its success, too.

I have no idea whether its share price will be $25 or $100 a year from now - nobody does - so I can't tell you what the stock market will do. What I can say is that, personally, if I were in some alternate universe and holding it as part of a well-diversified portfolio, paid in full in cash with no margin debt against it, on a balance sheet that had plenty of liquidity so I could survive an economic storm should it arrive, I'd be perfectly content to have it among the components. I'd let it sit in the custody account or safe deposit box for a decade or more and not think about it beyond getting the annual report each year, thrilled to collect my (most likely growing over time) dividends. I mean, absent some unforeseen event, I expect my parents to hold their stake for the rest of their lives. In the list of things about which I'd need to worry, it wouldn't make the top 1,000. That's just me, though. I have no idea what your situation is and can't talk about it except in broad, academic and hypothetical terms.

Josh, it's definitely a "forever hold" for me and I just wish I'd bought more in the $60s. I expect a growing dividend stream.

You're particularly correct about their cost of capital. Their recent bond offering was impressive.

What would be funny if Berkshire would come in and buy Hershey. Warren would love to buy Hershey from under Ms. Rosenfeld.

Lindt would have been an interesting buyer, too, but I don't think there's any way they could get it past anti-trust review given that they just recently bought Russell Stover in Kansas City. That company has been on my wishlist forever. One of these days, I'll get my chance. I'm not even kidding when I say that, when I do, Aaron and I will be flying to Switzerland to attend the shareholder meeting so we can get that once-a-year special chocolate box they give out at the annual meeting.

Just look at this loot!.

I was in San Francisco a couple of weeks ago and visited Ghirardelli Square. It was packed. Through a sea-salt-caramel-induced chocolate stupor, I marveled that all of us tourists, coming to pay homage to San Francisco history, were actually patronizing a faraway master in the foothills of the Swiss Alps.

Ideally Hershey never gets bought out. It'd be a massive disservice to the individual investor to no longer be able to be a part owner in this American gem. Although, my vote would be immaterial, as the Hershey Trust has the deciding votes, I would always vote No, regardless of the terms.

Josh,

Thanks for the post. I agree that it doesn't seem like the best fit for HSY. I am not a holder but hope this doesn't occur. I'm curious as to who else may be bidding for the asset (other than Nestle). Do you think KraftHeinz would also be interested in Hershey? Given 68% of Kraft's revenues are from the US, they could potentially run into anti-trust issues.

Thanks - Chris @ SleepyCapital.com

I was relieved for the short-term when Hershey rejected the first offer, because I have not pulled the trigger on adding HSY to my portfolio yet, as other companies currently have my interest. But, I was planning on acquiring shares within the next 12 months, and like you, I couldn't imagine a worse buyer than Mondelez under its current management. I suppose if the deal went through I'd focus on another well known sweets and snack giant, but the bold-type "HERSHEY" just has a sentimental value to it (along with being a cash machine) whenever I pass their goodies in the grocery store, and I feel a strong need to own a piece of it.

I was not surprised the the board rejected the offer, though I quite happy. For this area (central Pennsylvania), Hershey is very much an identity. Most people buy Hershey chocolate and that is it (this enables me to get extremely high end chocolate by the loads at .30 cents a bar on closeout regularly).

The identity is so strong that Derry township goes by the name of the company, Hershey. I believe that most if the trustees live in this area, and all are familiar with the school and the history. I really can not see them selling for what any rational company would pay to aquire it. And this again ignores that Pennsylvania legislators would take a keen eye on the situation as Hershey is a stone's throw from Harrisburg.

At any rate I was able to use this experience to try to explain some of the situation to my daughter about her shares. She seemed disinterested, buy she is young yet. I'm hoping the price drops back to the nineties. I was finishing Ron Chernows history on JP Morgan, and the eighties acquisition craze when this news broke. Mondelez folly reminds me of some of the hubris of that time.

It's interesting seeing how differently certain kids in the family think about their stocks. I have one nephew who cracks me up because he couldn't care less. I was trying to explain that one of his holdings makes locomotive engines and he looks at me and asks, in all seriousness, "Can we sell this and buy a train game?" (as in a video game that features trains in it). It's gotten better as he's gotten older, mostly because his sister lives and breathes it - it wouldn't surprise me at all if 25 years from now, she's working at the asset management firm with us - so he wants to know why she finds it so interesting.

Something I was talking about with my mom and dad the other day was how fascinating people's personal dividend preferences are. I was helping one my family members setup a retirement portfolio earlier this week and I had curated a list of companies for her from which she could select her holdings; a sort of paint-by-numbers where I've effectively limited the palette based on both underlying quality and current valuation. She had no interest at all in any stock that didn't pay a dividend, including Berkshire Hathaway. Furthermore, she didn't want the dividends to pool at the bottom account for redeployment with fresh cash deposits (my preferred method for capital allocation) but, instead, wanted each dividend reinvested into the component that paid it so each quarter, she could watch the actual share count grow and now that each was a self-contained project of sorts.

Who was it - Galbraith or Keynes, can't recall at the moment (it's 4:19 a.m. and I need to get to bed!) - who talked about the fact that, over enough time, a portfolio will begin to reflect the personality and values of the owner? It becomes a sort of mirror image of who they are as a person with their quirks and temperament shining through so you see their signature on it.

Your niece and nephew remind me of the Stanford Marshmallow Experiment. There are also studies (1, 2) that indicate girls are better than boys at delaying gratification, but only by a small margin.

I wonder if there are any behavioral finance studies linking portfolio preferences to other behaviors relating to delayed gratification (e.g. are gardeners more likely to use buy-and-hold than the general population?).

Are you going on a Chernow binge after hearing about the success of Hamilton on Broadway? I started with the House of Morgan, then Titan, and I'm about 1/3 of the way through Washington. Hamilton will complete this little quartet.

No, actually I had no idea that play had anything to do with him. I am woefully unaware of anything to do with Broadway. I chose this book because it was on sale and JP Morgan was the first stock I took an interest in. I did but the others though, and will be reading them as well.

I'm sure they would be interested and they are certainly capable of coming up with the financing. I'd think there'd be a higher chance of Berkshire Hathaway buying it directly, instead, in concurrence with certain iron-clad promises made to the trust that only a firm like it could provide but you never know. Life is strange. Crazy things happen.

I remember the first time, years ago, when I ate a disgusting oreo. I turned over the package and saw the Mondelez label, and thought to myself, man, I should let oreo know this licensed producer of their vending machine packages is producing shit. As I now wanted to eat a real oreo I stopped at the store on my way home and picked up a standard bag. When I got home I ate a second disgusting oreo. In horror I turned over the package and saw the Mondelez label. I then went to the internet and discovered that oreo as I knew it was gone. Nobody makes OREO anymore. They just make that foul shit and label it as oreo.

If Mondelez takes over Hershey I'm going to have to figure out how to grow my own chocolate.

The sad thing is that if you looked close at where it was made it probably was made in Moneray Mexico or Salinas Mexico.
I worked at Portland Oergon plant & retired just before this horrible co took over! They still make Oreo in the US. Check the
code dates. If it's MM or SM in it then it's made in Mexico. They were still making Oreo up until just last week in Chicago.
I understand they just shut that line down! Kraft Nabisco was the best of all the others that owned Nabisco plant. They cared about their products & never wanted to let bad product go out to the consumer. What a shame that this woman could be so greedy that she doesn't care what goes out the door. Just make money. She is Trying to break the union now with Nabisco. She bought the contracts that go with it but now wants to destroy it. What a shame, the people make good money have great insurance & a great pension! She wants to get rid of all that. Get rid of Nabisco name & it would have Mondeleez only on it. I will not buy anything with that name on it.
I still ask people to buy Nabisco products that have been made in the US. Watch your code dates on everything. I tell them you don't want to drink the water in Mexico would you want to eat the food that came from there.

This has caused me quite a bit of turmoil this past week. But if a vote were to happen, I would vote in favor of the takeover. I think it is the path that would get me to having control over my time the quickest, which is something I perceive to have enormous utility.

Hi Joshua,

Any chance you'd be the type to try Pokemon Go?

To All Hershey Members Mondelez will Strip you down ,begin to want and try cutting your pension and health care and then will no longer want to negotiate with you , Mondelez ruined the household name Nabisco and Family , Mondelez is known as Screamdelez , run like he'll when you hear they are coming.

Absolutly

I wanted to contribute, so I think I'll leave this link here.

https://s3.amazonaws.com/downloads.tenetpartners.com/Tenet-2016-Top-100-Most-Powerful-Brands.pdf

Hershey's is the second most powerful brand, with a five year variation of 0.

Interesting read on the Hershey Trust and Mondelez bid:
http://www.nytimes.com/2016/07/31/business/dealbook/back-stabbing-and-threats-of-a-suicide-parachute-at-hershey.html