Commentary

Whither Mondelez After Hershey Bid Fails?

Mondelez, which would not sweeten its takeover bid enough to suit Hershey’s taste, now may find itself turning into a tasty treat for another super-sized food company such as Kraft Heinz or PepsiCo, some observers say. Hershey, meanwhile, saw its share price plummet 11% in late trading Tuesday, a day after Mondelez announced that it was dropping its bid. It had risen recently on speculation that Mondelez would prevail. 

“Known for Oreos, Triscuits and other household brands, [Mondelez] could have used the $23 billion Hershey merger to bulk up and ward off potential acquirers. But the company said Monday there was ‘no path forward’ to a deal and walked away from discussions,” reports Craig Giammona for Bloomberg. “The question now for CEO Irene Rosenfeld is if there are any other buyout candidates — and whether getting swallowed by a bigger food giant such as Kraft Heinz Co. is inevitable.”

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“There really aren’t many obvious options,” Bloomberg Intelligence analyst Ken Shea tells Giammona. “Hershey was a unique opportunity. They were willing to do it because it was an obvious fit.”

But “Rosenfeld faced staunch opposition from the Hershey Trust, a $12 billion charity created by the company's founder a century ago. The trust owns 34% of the company's shares and controls about 80% of the vote,” points out Sarah Whitten for CNBC

“Rosenfeld privately indicated to Hershey officials a willingness to raise the bid to $115 a share last week [from $107], according to a person familiar with the matter. Hershey responded that the starting point for discussions would need to be $125 a share,” Tess Stynes reports for MarketWatch

Activist investors — particularly William Ackman’s Pershing Square Capital Management and Nelson Peltz’ Trian Fund Management — together own more than 10% of the company when you factor in options and forward contracts, are presumably happy about the development. They want costs cut and margins improved, Annie Gasparro points out in the Wall Street Journal. Investors were gleeful, too — Mondelez’ shares rose nearly 4% yesterday.

“The latest turn of events puts even more pressure on Mondelez management to produce results on the cost-cutting front,” Gasparro writes. “Ms. Rosenfeld has promised to expand the company’s operating margin to 17% to 18% by 2018. They hit 15% in the most recent quarter.”

Ackman, in fact, thought the whole Hershey deal was a distraction although Rosenfeld defended it through a spokesman as “motivated by our belief that a combination offered a unique opportunity to enhance the prospects of both companies,” Gasparro reports.

Barron’s Johanna Bennett cites a note by Morgan Stanley analysts Matthew Grainger, Pamela Kaufman and John Colantuoni in which they “view this development as a net positive” for Mondelez, saying that it “should refocus investor attention on the company’s compelling category footprint, peer-leading margin expansion, and strategic potential as a standalone company.”

Indeed, Bennett writes, “Mondelez is more than a takeout target. Efforts have been long underway to restore profit and sales with the company cutting costs, jettisoning under-performing brands and investing in more profitable ones.”

As for Hershey, it has 31.3% market share in the U.S. in the candy, mint, and gum category, and Daniel Jones, manager of Avaring Capital Advisors, LLC — revealing that he has no stake In the company — sees it as an attractive investment,

“Of course, shares may continue to fall but absent something really bad like terrible mismanagement or fraud, Hershey appears to offer relatively safe and attractive prospects without being bought out and always has the potential to soar again should Mondelez come back or another company offer to buy up the enterprise,” he writes on Seeking Alpha

Over on The Street, Bob O’Brien sees future mega-deals as inevitable given how hard it is out there in a marketplace increasingly saturated by the likes of farmers-market fruit, home-brewed Kombucha and pesticide-free veggies from the backyard garden.

“For the record, branded products companies are gasping for anything approaching organic growth. We, as a society, have officially reached the saturation point in our appetite for the stuff that's in our cupboards, whether it's dried pasta, aerosol cheese or condensed milk,” he writes.

“For growth, branded products companies have to acquire it. Roll up what's either a complementary operator or, even better, a competitor, and the CEO gets to tell investors, ‘See, I've achieved what nobody else in our industry is able to do: I've swollen the top line. Appreciably.’”

Burp.

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