Mondelez Signals Commitment to Cuts -- WSJ
August 31 2016 - 3:03AM
Dow Jones News
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.
Corrections & Amplifications: But without the Hershey
combination, Mondelez could be relatively attainable by a larger
player in the food-and-beverage industry. An earlier version of
this article incorrectly stated that Mondelez could be relatively
attainable by a larger player with a merger.
--David Benoit contributed to this article.
Write to Annie Gasparro at annie.gasparro@wsj.com
(END) Dow Jones Newswires
August 31, 2016 02:48 ET (06:48 GMT)
Copyright (c) 2016 Dow Jones & Company, Inc.
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