Glenboden M & A Originations

Hershey's options for an international breakthrough in confectionery

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Origination Status Hershey Trust announcement concerning international acquisitions, December 2007;
Asset candidates include Glisten (UK), SladCo and Krupskaya (Russia);
Buyer The Hershey Company (USA), largest confectionery producer in the USA;
Seller business owners in high-value developed markets and/or BRIC countries;
Buyer Rationale more aggressive pursuit of international growth;
Seller Rationale attractive valuations;
NBs Hershey Trust controls 80% of voting shares, and has 30% economic stake, in Hershey
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Hershey is not a company accustomed to making big overseas acquisitions. In the last five years, their ambitions have been limited to two relatively small JVs, namely Lotto in China and Godrej in India, where the principle aim was to leverage their local partners’ distribution reach for selling Hershey’s existing brands. Their main shareholder clearly now wants this to change, for Hershey to become more like Cadbury in terms of international acquisitions. If the Hershey leopard does change its spots, then we think it’ll focus on ‘new frontiers’ – in terms of both categories and geographies.

The Hershey – Cadbury merger rumours are surely a ‘red herring’. Cadbury’s new confectionery strategy announced in June 2007, and the spate of M&A activity which followed it, gives a strong signal that Cadbury doesn’t want to be involved in a big merger. Besides, Cadbury is twice as big as Hershey, and has a far larger international footprint, so the only logical outcome of a ‘merger’ would be the effective sale of Hershey to it. The Hershey Trust’s recent announcement, that it wants to retain control of the company, presumably means ‘sudden death’ for those rumours.

The Hershey Trust justified its pressure on the company, to be more aggressive, by saying that it’s unhappy with efforts to improve Hershey’s performance simply by relying on product innovation, efforts to build international sales, and moving some production to Mexico.

So what are Hershey’s acquisition options ? In developed markets, with lower growth rates, they would have to buy strong brands, in order to have a sufficient top-line impact to satisfy analysts and investors. In Europe that might be difficult, since the big confectionery players, like Storck or Perfetti, are mostly family –owned and generally not for sale. Given that Hershey is a relative novice in international M&A, the company might anyway shy away from continental Europe. How about the US –friendly UK ? One possible target there is Glisten. In only five years, this AIM –listed company has rolled up eight companies, has a strong ‘better for you’ snacks focus, is profitable, and would deliver over $100 mln in top-line growth to Hershey on day one. Hershey might also gain a lot of acquisition and integration expertise from Glisten.

The other option for Hershey is to look at new geographic frontiers. Probably, like Wrigley, they would look at the biggest countries and growth rates, and maybe have a minimum top-line contribution of, say, $100 mln. So, countries like Russia, maybe Ukraine, Turkey; also India and China where Hershey already has a presence through JVs. The trouble is, it’s hard to find attractive brands in these often fragmented markets, especially ones that haven’t already been acquired by, well, Cadbury. The fact that Wrigley earlier this year paid x3 Sales for A.Korkunov in Russia, a niche producer established as recently as 1999, illustrates this dearth very well. As does the x4 Sales paid by Cadbury for Intergum in Turkey. Maybe Hershey should give Orkla Foods an offer they can’t refuse for SladCo and Krupskaya ? Orkla is far from being a confectionery specialist.

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