Hershey Co’s executives and board members are divided on whether to make a bid for Cadbury Plc and have yet to arrange financing for an offer, according to people with knowledge of the matter.
The board met on January 4 without reaching a decision, said the people, who declined to be identified because the talks are private. Some members of Hershey’s controlling trust, led by former Pennsylvania Attorney General LeRoy Zimmerman, have been advocating a deal, while Chief Executive Officer David West is among those concerned about the debt a purchase would entail, the people said.
An offer would compete with Kraft Foods Inc.’s £10.9 billion ($17.5 billion) hostile bid and would involve swallowing a company more than twice Hershey’s size. To fund a purchase, Hershey may pledge to sell assets such as the US rights to the Kit Kat and Rolo brands or Cadbury operations in certain countries, the people said. “A bid does make a lot of sense but they would have to incur some debt,” said Roy Behren, who helps manage $2.4 billion at Westchester Capital Management in Valhalla, New York. “I don’t know to what extent they’re willing to risk the investment grade credit rating.”
Standard & Poor’s has an A rating on Hershey’s debt, or five levels above junk, with a negative outlook.
Kirk Saville, a spokesman for Hershey, declined to comment. Tim Reeves, a spokesman for the Hershey Trust, declined to comment.
Kraft said yesterday it would boost the cash portion of its offer, as investor Warren Buffett objected to Kraft’s proposal to issue millions of shares to finance the deal.
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The larger cash component was expected by Hershey and doesn’t preclude a bid for Uxbridge, England-based Cadbury, the people said. About 1.5 per cent of Cadbury investors have so far accepted Kraft’s offer, Kraft said in a statement today.
“If Hershey was seriously thinking about making an offer for Cadbury, the last 24 hours’ news makes it easier for them to make it attractive to Cadbury shareholders,” said Sachin Shah, a special situations and merger arbitrage strategist at Capstone Global Markets LLC in New York.
Hershey, with the help of former Goldman Sachs Group Inc. banker Byron Trott and his new firm, BDT Capital Partners, is looking for investors such as wealthy individuals to buy equity in the combined company, the people said. JPMorgan Chase & Co. and Bank of America Corp. are in talks over providing billions of dollars in loans for the deal, they said.
A spokeswoman for BDT Capital declined to comment.
Hershey hasn’t yet obtained formal commitments for either the equity or the loans as it continues to debate whether to move forward, the people said. The company is unlikely to team up with private-equity firms, they said.
Cadbury’s Chairman Roger Carr in December said the Cr‘eme Egg maker has told Hershey “very clearly what the rules of the game are” and said Cadbury would be willing to sit down and talk with Hershey if the US company develops a “compelling offer” that was fully financed.
Cadbury Chief Executive Officer Todd Stitzer on December 19 told investors in New York that Hershey could expect higher earnings per share than Kraft by buying the UK confectioner, even though a Kraft deal would present more cost-cutting opportunities, according to three people who heard the statement.
Hershey has “an excellent position in chocolate, a strong route to market and great heritage,” Stitzer said in a December 23 interview in the Daily Mail.
Hershey’s trust holds about 80 per cent of Hershey’s voting power and 31 per cent of common shares. Besides Zimmerman, the other trust members on Hershey’s board are James Nevels, chairman of the Swarthmore Group, an independent investment and financial advisory firm he co-founded in Philadelphia, and Robert Cavanaugh, who graduated from the Milton Hershey School.
Hershey rose 95 cents, or 2.6 per cent, to $37.17 yesterday in New York Stock Exchange composite trading, while Cadbury dropped 26 pence to 779 pence in London. Kraft added $1.34 to $28.77. Based on that closing price, Kraft’s cash-and-stock offer values Cadbury at 766 pence a share.