Hershey (HSY) is once again mentioned frequently as a buyer of Cadbury (CBY). To win a competition it would have to top the $16.6 billion offer from Kraft (KFT) Cadbury shares already trade above the Kraft offer in the anticipation of a second bidder or a higher offer from Kraft.

Hershey has a problem in completing a takeover of Cadbury. It is smaller than both the UK company and Kraft by both sales and market cap.

Cadbury’s market cap is $18 billion and it had sales of $7.8 billion last year. Hershey’s market cap is just over $8 billion and its sales last year were just over $5 billion. By contrast, Kraft has a market cap of $42 billion and 2008 sales of $42 billion.

The trust that controls Hershey and the company’s board have apparently given a go ahead to a bid for Cadbury. Hershey is in the process of getting private equity support for the deal and the Hershey trust would make a $1.25 billion investment according to MarketWatch.

The deal would almost certainly have to look like a merger of equals than a takeover which might allow Hershey to put very little cash into the deal. Otherwise, the US company is forced with diluting its current shareholders by a large amount and taking on a mammoth debt load.

Hershey’s bid may not be successful because it involves leverage that large Cadbury investors would like to avoid in a combined busiess.The cash flow from a Hershey combination with Cadbury would probably make debt service a threat to the future of the new firm.  The Kraft offer at least has a large cash component.

Hershey’s hurdle to winning a fight for the UK company may simply come down to David not being able to slay Goliath.

Douglas A. McIntyre

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