Gulping down a Caramilk bar, a Reese's Peanut Butter Cup and some Nutella spread may sound like a recipe for indigestion.
But for chocolate makers Hershey Co. of Hershey, Pa., and Italy's Ferrero International SA, swallowing the much larger Cadbury PLC of Britain would instantly vault the companies into the confectionery Big Leagues.
Hershey and Ferrero both confirmed yesterday that they're eyeing Cadbury, the maker of Caramilk, Dentyne gum and Halls cough drops. Neither company would confirm published reports they have been quietly talking for weeks about a possible joint bid that would top Kraft Foods Inc.'s hostile $16.4-billion (U.S.) offer.
In a terse statement, Hershey said it is "reviewing its options and at this stage there can be no assurance that any proposal or offer from Hershey will be forthcoming." Ferrero issued a similar statement.
Cadbury spokesman Trevor Daston insisted the company is committed to soldiering on as a "standalone pure-play confectioner," but would consider "any serious offer that delivers full value for the company." Cadbury has already recommended to investors that they reject the Kraft offer.
There is compelling logic to a joint Hershey-Ferrero deal.
Hershey is the undisputed king of the North American chocolate and candy business, but with just 14 per cent of its sales offshore, it badly needs some exposure to Europe and fast-growing Asia.
"Hershey would achieve instant access to Asia's most attractive confectionery markets - India and China - and would become the second-largest player in Western Europe," said analyst Ildiko Szalai of Euromonitor International in London.
Likewise, privately held Ferrero needs to gain some global heft to compete against much larger rivals Mars Inc., Kraft and Nestlé SA.
Analysts also pointed out that acting alone, neither Hershey nor Ferrero would have enough borrowing power to acquire Cadbury.
A deal would also put the two companies in a much better position to drive a better bargain in their purchases of cocoa - the key ingredient in chocolate.
"Together, Cadbury, Ferrero and Hershey would gain control of the cocoa market, which is the rationale of such a potential deal," said Arnaud-Cyprien Nana Mvogo, a merger arbitrage analyst at Aurel BGC in Paris.
Doing a deal, as Kraft is finding out, won't be easy. The Italian and U.S. companies will likely have to come up with more cash, and perhaps stock as well.
And there are several stumbling blocks to overcome, including antitrust issues, in the United States and Europe.
And both companies are primarily chocolate makers, making it tricky to divvy up Cadbury's prized chocolate assets.
"Both companies are primarily interested in Cadbury's chocolate portfolio [so] the sharing of Cadbury could get complicated," pointed out Euromonitor's Ms. Szalai.
But perhaps the most significant hurdle could be the unique ownership structure of Hershey and Ferrero.
Hershey's founder, the late Milton Hershey, set up a charitable trust that still controls roughly 31 per cent of the stock and nearly 78 per cent of the votes. The trust's current chairman, Leroy Zimmerman, has made it clear that he has no interest in ceding its controlling stake as it pursues expansion opportunities, hampering its ability to use its stock to finance a purchase.
And yet diluting its voting block into a single class of shares might be the only way to finance a deal.
Ferrero is a family-controlled private company, raising similar control concerns.
"Ownership issues on both sides ... could be a major obstacle to concluding a deal," Ms. Szalai argued.
Not unlike many corporate mergers, the rationale for entering a bidding war is often as much defensive as it offensive. The chocolate and candy market is pretty mature in North America and Europe, where the population is aging fast and trying to get healthier. In that tough environment, it's eat or be eaten.
In 2002, the Hershey trust put its controlling stake on the auction block, but ultimately rebuffed offers from Wm. Wrigley Jr. Co. and a joint bid from Nestlé and Cadbury amid stiff political opposition in Pennsylvania.
Hershey could also lose big just by doing nothing. The company currently sells some key Cadbury products under licence, including Cadbury and Caramello brands in the United States, as well as York peppermint patties and Almond Joy bars worldwide.
"Hershey seemingly has the most to lose by Cadbury going to Kraft Foods," Christopher Growe, an analyst at Stifel Nicolaus in St. Louis, Mo., said in a research note.
With files from Bloomberg News
HERSHEY (HSY)
Close: $37.63 (U.S.), down 78¢
CADBURY (CBY)
Close: $53.46, down 54¢
KRAFT FOODS (KFT)
Close: $27.26, down 38¢
***
The candy bar chart
Ferrero and Hershey need to gain some global heft to compete against rivals Mars Inc., Kraft and Nestle SA.
WORLD CONFECTIONERY, 2008
..........................................MARKET SHARE, %.......$BILLION (U.S.)
Mars Inc.......................................14.5%......................$24.19
Cadbury Plc................................10.2............................17.02
NestlÈ SA.....................................7.8............................13.06
Kraft Foods Inc.............................4.7..............................7.88
Hershey Co, The..........................4.6..............................7.60
Ferrero Group..............................4.5..............................7.52
CHOCOLATE CONFECTIONERY, 2008
..........................................MARKET SHARE, %.......$BILLION (U.S.)
Mars Inc......................................14.5%......................$13.34
NestlÈ SA...................................12.7...........................11.67
Kraft Foods Inc.............................8.4.............................7.75
Ferrero Group..............................7.3.............................6.74
Cadbury Plc.................................7................................6.44
Hershey Co, The.........................6.7.............................6.12
THE GLOBE AND MAIL / SOURCE: EUROMONITOR INTERNATIONAL
