By Annie Gasparro 

Now that a takeover of Hershey Co. is off the table, snack giant Mondelez International Inc. and its Chief Executive Irene Rosenfeld have signaled that ongoing cost cutting will be the way to profitability.

Mondelez investors seemed to welcome the end of the months-long play by the Oreo maker for the famous chocolate company. In late U.S. trading Tuesday -- a day after Mondelez said it walked away from its pursuit of the big chocolate maker -- Mondelez shares were up 4%, while Hershey shares were down nearly 11%. Mondelez's latest bid was rejected by Hershey last week, according to people familiar with the matter.

In fact, some Mondelez stakeholders, like activist investor William Ackman who holds a 5.6 % stake including options, have made it clear that executives should keep their heads down and focus on slashing expenses since its profit margin was among the worst in the industry as of a couple of years ago.

But while free to focus on meeting cost-cutting targets, Mondelez could face fresh questions about whether it now risks becoming a takeover target itself.

A deal with Hershey would have created the world's largest candy company, eliminating virtually any chance of Mondelez being targeted by a rival. Merging with Hershey would have let Mondelez "control their own destiny, " said Brittany Weissman, an analyst at Edward Jones.

Some industry observers said that while Mondelez now could be relatively attainable by a larger player in the food-and-beverage industry, like Kraft Heinz Co. or PepsiCo Inc., its current market value of about $70 billion makes it a tough target, especially if it is unwilling to sell.

Yet the latest turn of events puts even more pressure on Mondelez management to produce results on the cost-cutting front.

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.

Mr. Ackman, and other activists like Trian Fund Management LP, who holds a 3 % stake and whose co-founder, Nelson Peltz, has a seat on the board, are particularly focused on her hitting that target, according to people familiar with the matter.

That focus will also likely reduce Mondelez's flexibility to buy assets, as seen by Mr. Ackman's public concern the Hershey deal would "distract" from hitting the margin target.

Ms. Irene Rosenfeld, who has spent a decade as CEO with several interactions with activist investors, has said Mondelez doesn't need an acquisition to improve its profitability. "Our discussions with Hershey were motivated by our belief that a combination offered a unique opportunity to enhance the prospects of both companies," said a spokesman for Mondelez on Tuesday. The company wouldn't make Ms. Rosenfeld available for comment.

For Hershey, its stock had risen over the past several months on speculation of a buyout. With other suitors unlikely, Hershey's stock deflated on Tuesday.

Some industry observers say another bid by Mondelez for an international candy maker like Ferrero isn't out of the question.

In the past, Ms. Rosenfeld has been pressured by Mr. Peltz to consider merging with PepsiCo's Frito-Lay business.

Companies have often looked to deals to help reduce overall costs as consumers' appetite for healthier and more natural food also hurt businesses that sell sweets.

Industry analysts had questioned Mondelez's offer, which would have been valued at upward of $25 billion, arguing that Hershey is largely concentrated in the U.S. and the candy aisle, both of which have seen slowing sales growth in recent years.

The explosion of food merger and acquisition activity last year led to more than $116 billion worth of deals involving U.S. companies, the largest total dollar amount in at least two decades, according to data from Dealogic.

In moves that catered to the growing population of health-driven customers, Danone SA announced a $10.4 billion takeover of WhiteWave Foods Co. last month. Last summer, Hormel Foods Corp. made what it said was its largest ever acquisition when the company paid $775 million for organic-meats company Applegate Farms LLC. In 2014, General Mills Inc. paid $820 million for Annie's Inc., known for its organic macaroni and cheese.

Mondelez has a complex deal-making history. The company is the product of a 2012 separation from Kraft Foods Inc., which had been under pressure from Trian and other activist investors. That came only two years after Kraft had acquired the U.K. chocolate company Cadbury PLC for $19 billion, and the chocolate assets went with Mondelez in the separation.

--David Benoit contributed to this article.

Write to Annie Gasparro at annie.gasparro@wsj.com

 

(END) Dow Jones Newswires

August 30, 2016 17:19 ET (21:19 GMT)

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