HSY Hershey Company

Snack giant ends monthslong pursuit after chocolate maker rebuffs raised bid

By Annie Gasparro and Dana Cimilluca 

Oreo cookie maker Mondelez International Inc. ended its pursuit of Hershey Co. after the famed chocolatier rebuffed its latest acquisition offer, putting an end to a monthslong takeover campaign that would have created the world's largest candy company.

Hershey last week rebuffed a new bid by Mondelez, the second one since June, and indicated it would be difficult to strike a deal before next year because of the shifting dynamics at its controlling shareholder, the Hershey Trust Co., according to people familiar with the matter.

Mondelez said in a statement late Monday there was "no actionable path forward" to buy Hershey, which confirmed that there were additional communications with Mondelez but wouldn't comment further.

Mondelez's failure to pull off the takeover, which would likely have been valued at upward of $25 billion, will likely reinforce the notion among analysts and investors that Hershey is unattainable as an acquisition target in light of its majority ownership by a trust that for years has been reluctant to sell.

The Hershey Trust, which controls about 81% of Hershey's shareholder votes, is in the midst of overhauling its own board of directors following an investigation by state regulators, and investors had wondered if Mondelez would be able to win its approval by striking during a period of uncertainty.

Mondelez Chief Executive Irene Rosenfeld walked away from her goal of creating a snacking and confectionary giant that would benefit from giant global scale and the combination of major brands like Chips Ahoy and Reese's peanut butter cups.

Hershey's stock dropped 12% after market hours Monday while shares of Mondelez rose 3.4%.

Mondelez initially made a roughly $23 billion bid for Hershey, The Wall Street Journal first reported in June. Hershey rejected the offer, which amounted to $107 a share, half in cash and half in stock.

Ms. Rosenfeld privately indicated to Hershey CEO J.P. Bilbrey last week a willingness to raise the bid to $115 a share, the people familiar with the matter said.

Hershey responded that the starting point for discussions would need to be $125 a share. Hershey also indicated that the trust would need to complete a reconstitution before there could be a deal, and that isn't expected until possibly late next year, some of the people said.

Hershey, with a namesake hometown in Pennsylvania built by its success, and Deerfield, Ill.-based Mondelez, both have been under pressure in the U.S. amid a trend toward healthier eating.

Pablo Zuanic of Susquehanna estimated that had they merged, the combined company would see a sales increase of between 9% and 19%.

Mondelez could have helped Hershey expand overseas while Hershey's U.S. chocolate prowess had the potential boost Mondelez domestically.

Hershey had $7.4 billion in annual sales last year, while Mondelez towered over it, with $30 billion

Hershey arguably had the most to gain from the hypothetical deal, in that it has been trying to diversify from its largely U.S. candy business, whose products include chocolate Kisses and Jolly Ranchers, to more international markets and new products sold in the broader snack aisle.

Both of those efforts would have been achieved swiftly with an acquisition by Mondelez, Mr. Zuanic noted.

If the outcome of the talks with Mondelez were to attract other bidders, they may need to be more patient than Mondelez.

The Hershey Trust, as part of a settlement with state regulators, isn't likely to have a reconstituted board of directors until the end of 2017.

The trust, which oversees billions of dollars for a local, nonprofit school, has agreed to make significant governance changes in response to the Pennsylvania attorney general's office investigation into allegations of excessive compensation and conflicts of interest.

"Once a totally new Trust Board is in place, by early 2018, things could be different, but we are uncertain Mondelez will exist in its current form by then," Mr. Zuanic said in a note to investors earlier this month, hinting at the possibility that Mondelez would go after another smaller rival or become a takeover target itself.

Ms. Rosenfeld said in prepared remarks Monday that while the company was disappointed, it remains focused on its efforts to deliver sustainable sales growth and stronger margins. Mondelez will be disciplined in its approach to generating value, including through acquisitions, she added.

Indeed, Mondelez called off the pursuit because the deal was attractive but not essential and because it was eager to avoid overpaying, according to one of the people familiar with the matter.

Mondelez plans to provide more details at an industry conference on Sept. 7.

While the mergers-and-acquisitions market remains relatively healthy, the proposed combination isn't the only one to have unraveled this year. In March, Honeywell International Inc. pulled the plug on its $90 billion bid for United Technologies Corp. and, in April, Pfizer Inc. walked away from its deal to buy Allergan PLC, which ranked as 2015's largest deal.

Mondelez, meanwhile, is under pressure to cut costs and improve its lagging profit margin, with Nelson Peltz on its board and fellow activist investor Bill Ackman as a major shareholder. Those two are unlikely to support a bidding war that could distract Mondelez from its annual savings goals.

Engaging in a big deal with those pressures is never easy, and trying to convince a likely unwilling seller like the Hershey Trust made it even harder.

--Tess Stynes, Dana Mattioli and David Benoit contributed to this article.

Write to Annie Gasparro at annie.gasparro@wsj.com and Dana Cimilluca at dana.cimilluca@wsj.com

(END) Dow Jones Newswires

August 30, 2016 02:48 ET (06:48 GMT)

Copyright (c) 2016 Dow Jones & Company, Inc.