Hershey, Ferrero Consider Cadbury Bid

Posted by: Kerry Capell on November 18, 2009

A bidding war looks set to ensue for British confectionary maker Cadbury (CBY) after U.S. chocolatier Hershey (HSY) and Italian confectioner Ferrero issued separate statements confirming their interest in the company. After rejecting an initial $16.7 billion offer in September, Cadbury dismissed Kraft’s latest proposal of $16 billion on Nov. 9 as “derisory.”

Strategically, the three-way tie-up makes sense. Hershey, which already owns the license to produce Cadbury chocolates in the U.S., would gain access to faster growing emerging markets. The U.S. company also would get a foothold into the non-chocolate confectionary market through Cadbury’s gum brands and Ferrero’s ownership of Tic-Tacs. And Ferrero, whose sales are now focused on the Italian, German, and French markets, would get much greater global exposure.

Culturally, the three companies share similar values. Cadbury has a long heritage as a socially responsible employer. That’s a focus Cadbury has tried to embed in its brands, such as premium organic chocolate maker Green & Black’s. A big proponent of ethical sourcing, Cadbury has pledged that 25% of its Cadbury Dairy Milk global sales and 350 million Cadbury Dairy Milk bars will be Fairtrade certified in 2010.

Similarly, publicly traded Hershey is controlled by the Hershey Trust, set up by the company's late founder, Milton Hershey, to oversee and fund a school for disadvantaged children. The trust holds roughly a third of Hershey shares, but has nearly 80% of the voting control. Privately-held and family-run Ferrero shares a similar ethos. Michele Ferrero, son of the company's founders, set up the Ferrero Foundation in 1983 to offer social programs for retired employees.

The success of any bid, of course, will depend on much more than shared values. For starters, both Hershey and Ferrero, with annual sales of $5 billion and $9.3 billion respectively, are much smaller than $42 billion Kraft (KFT). It's unclear whether or not they can come up with the financing. Moreover, the Hershey Trust has stymied deals before. In 2002, the trust pulled out of a possible sale to Wrigley, which was later acquired by Mars. And a big merger might jeopardize the trust's ability to fund the school.

The confectionary market is consolidating, and this may have given new impetus to smaller players such as Hershey and Fererro to act or risk being left behind. It's unclear whether a three way tie-up between the candymakers might trigger antitrust concerns. Many analysts reckon that's one reason why Switzerland's Nestlé has not joined the fray. EU Competition authorities will rule on Kraft's bid in December. Whether or not Hershey and/or Ferrero will make a formal offer depends on their access to financing, given that British takeover rules require that any rival bidders secure financing before bidding.