Mondelez International Makes Bid To Acquire The Hershey Company
Mondelez International, maker of Cadbury Chocolate and Oreo Cookies, has launched a takeover bid for The Hershey Company.
The shares are skyrocketing but the terms of the deal, including the price, are currently unknown.
In other words, Irene Rosenfeld, a woman that, in my personal opinion, is one of the worst executives of any Fortune 500 company in the past 25 years given her almost breathtaking ability to destroy intrinsic value in her pursuit of empire building, has now set her eyes on the Pennsylvania chocolate giant. I cannot think of a worse possible management team in the entire packaged food industry to take over Hershey. In the past, I believe she has shown an infuriating disregard for the input of owners, she engages in transactions that are mathematically stupid once you account for taxation consequences, she moves around pieces without accomplishing much, and, in a quest to show at least some progress, she starts hacking away at brand equity that took, in some cases, more than a century to build by cheapening or modifying ingredients to try and squeeze a few extra pennies of temporary profit out of a name. Her arrogance is astonishing. She has no respect for shareholders. She has no respect for employees. She has no respect for consumers. She is the embodiment of nearly everything I find distasteful about corporate America.
In truth, I fully expected her to find herself at the end of her career soon. Though Warren Buffett comes off as avuncular, I think anyone who has watched him for a long time realizes there is a cold, calculating, ruthlessness about him that is willing to play the long-game. He is not always motivated solely by money. After she so publicly disrespected him in the old Kraft reorganization before she bought Cadbury and shattered the company into two – engaging in a series of moves that caused the elder statesman of Wall Street to break his long-established rule of not criticizing publicly when he called one of the deals “particularly stupid” while Nestle quickly took advantage of the situation, using its checkbook to pick up the fantastic assets she was so willing to throw away at a bargain price – Berkshire Hathaway partnered with 3G to acquire the post-Rosenfeld Kraft, overhaul it, bring it into the 21st century, and recapitalize it in a way that it was clear he intended to use it as a sub-holding company to mop up the packaged food industry; a holding company within a holding company. Furthermore, I also put the probability at significantly above-average 3G wanted or needed to liquidate its equity stake at some point, giving Berkshire Hathaway the ability to acquire the whole thing years or decades down the line lock, stock, and barrel.
I expected Mondelez International to be in Kraft Heinz’s crosshairs. I think Buffett wants Oreo and the other assets that were once his back on the balance sheet and has been moving chess pieces to get them. It’s the sort of thing that would give him quiet satisfaction; knowing that he ended up with all of the chips. The man spent decades stalking GEICO. His sniper analogy when it comes to “bagging elephants” is more accurate than many realize.
From the early details that have emerged about the potential Mondelez offer, Rosenfeld wants to create the world’s largest stand-alone snack company, move its global chocolate headquarters to Pennsylvania, and basically create a powerhouse. On paper, a merger like this makes perfect sense. Assuming the terms and price were attractive, I’d support Hershey having made the bid for Mondelez. The problem is management. I don’t trust Irene Rosenfeld to have the best interest of shareholders, employees, or consumers at heart. If it proceeds, this story ends with her getting richer as she leaves a graveyard of sub-par products in her wake, putting short-term results ahead of long-term intrinsic value unless we somehow get lucky and she’s forced out or retires shortly after the deal closes.
What’s going to be interesting will be the response of The Hershey Trust. I have an enormous case study file on the legal structure of the trust, particularly around the last major takeout attempt that happened and the drama that unfolded with the Attorney General of Pennsylvania. This time around, the equity stake is lower but, ultimately, the trust is the only shareholder that matters in determining whether the bid is accepted as Hershey operates as an essentially private company. From a long-term perspective, I think any bid less than $140 to $150 per share is not particularly wise to accept. Even then, I think it’s a poor consolation prize for the decades of nearly recession-proof compounding the company is capable of generating, isolated from many of the storms of Wall Street due to its one-of-a-kind ownership structure and unique economics. More importantly than any of that, I think anyone who puts faith in a word that comes out of Rosenfeld’s mouth is a fool. She may be a nice lady but nice isn’t the same as good nor competent.
As long-term stockholders with shares of Hershey shoved in nearly every imaginable account, including the accounts of three generations of Kennon and Green family members, we hope one of two things happens:
- The merger fails and the stock price drops, which is a great outcome for long-term owners
- Hershey turns the tables and pursues Mondelez, perhaps with financing from Berkshire Hathaway
Although I wouldn’t like it, I might be able to grudgingly accept a Nestle bid. Despite that, Aaron put it best when he said the deal is unnecessary. Hershey doesn’t need to be bought. There needs to be more than one chocolate company in the world.
This deal should not happen from an anti-trust perspective.
This deal should not happen from a shareholder perspective.
This deal should not happen from an employee perspective.
This deal should not happen from the perspective of the trust, which relies upon Hershey’s dividends to fund its mission.
If it does, it will be a case of people choosing short-term gain over long-term wealth. It’s not a wise way to behave.
All we can do now is wait. We’ll see how it turns out in the end. If it’s anything like the last time this happened, it’s going to be interesting to watch.
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