What Will Hershey (HSY) Have To Pay For Cadbury (CBY)? $20 Billion

Hershey Co. (NYSE: HSY) may be posturing to top Kraft Food Inc.’s (NYSE: KFT) bid for Cadbury Plc. (NYSE: CBY) Hershey would likely make a friendly bid, at least 10 percent higher, between $19 billion to $20 billion, as the maker of Reese’s Peanut Butter Cup considers bidding for a company more than twice its size by market capitalization.
It’s not a matter of should Hershey bid for Cadbury, but how soon and how much it should bid to top U.S. rival Kraft. Hershey needs to bid for Cadbury to expand its reach in order to compete with privately held Mars, Inc., which, along with Warren Buffett’s Berkshire Hathaway Inc., bought the world’s largest chewing gum producer, Wrigley, for $23 billion in cash two years ago. Hershey’s has seen Mars, with its Snickers, M&M’s and other candy products, chip away at its candy sales and cannot stand by as Mars and now Kraft, threaten to put Hershey’s in their rear view mirror by outgrowing the Hershey, Pennsylvania-based company.

The Hershey-bar maker is considering bidding on its own, getting help from banks such as Bank of America, or with a partner such as Ferrero SpA, the Italian maker Nutella hazelnut spread and Ferrero Rocher chocolates, the Wall Street Journal reported in November. Today, the Journal reported that Ferrero may join with Blackstone to bid for Cadbury and that Hershey and Ferrero have, at the moment, stopped talks for a joint bid, according to Deal Reporter. In any case, Hershey would need help to finance the bid, since it has only $119 million in cash as of Oct. 4, 2009. The company has $1.7 billion in debt, which would allow it to take on more debt for a Cadbury bid.

Cadbury would likely be open to a bidding war, certainly if Hershey’s sweetens the price and the amount of cash offered in a potential bid for Cadbury. Indeed, at this point, the only thing getting in the way of Hershey is Hershey itself. Some members of Hershey’s board are averse to taking on debt to finance an acquisition. The company hasn’t yet arranged financing for an offer, people with knowledge of the matter have told Bloomberg News, as executives at the largest chocolate manufacturer in North America are divided on whether to bid for Cadbury.

“A bid does make a lot of sense but they would have to incur some debt,” Roy Behren, who helps manage $2.4 billion at Westchester Capital Management in Valhalla, New York, told Bloomberg News. “I don’t know to what extent they’re willing to risk the investment grade credit rating.”

While the company may not want to risk its credit rating or its debt, those risks may be the least of its concerns. As Mars and Kraft expand their brands, Hershey will be looking more like a smaller player in the candy market. It’s time for Hershey to think globally, lest they become a niche player in the world of chocolate.

Update: At 4 PM The Wall Street Journal reported private talks between Cadbury and Hershey

Anthony Massucci