Hershey, Ferrero sweet on Cadbury following failed bid by Kraft

Just when you thought Cadbury (CBY) might just gather up its creme eggs and call it quits on buyout talks, two additional suitors have stepped forward to woo the legendary British chocolate company. Hershey (HSY) and Italy's Ferrero have confirmed they are interested in bidding for Cadbury, following its rejection of Kraft Food's (KFT) $16.4 billion offer last week.

In a written statement Wednesday, Pennsylvania-based Hershey acknowledged recent media speculation regarding a potential bid for Cadbury. The company said it is reviewing its options but, "there can be no assurance that any proposal or offer from Hershey will be forthcoming."
Hershey's statement was quickly followed by one from Ferrero, which confirmed it was in the "preliminary stages of evaluating its options," the Guardiannewspaper reported. The Piedmont-based confectioner is perhaps best known for its Ferrero Rocher chocolates.

Hershey may not have the financial wherewithal to craft a buyout package suitable to Cadbury, leading to speculation that Hershey might work with Ferrero in making a combined bid, Forbes.com reported. Hershey and Ferrero could also turn to the private-equity market to bolster its offer. But both are hamstrung by their family-run corporate structure that limit their ability to do any massively dilutive equity deals, according to FT.com.

"They would need to lever up significantly," a source familiar with the situation told the financial news site, noting that he was "extremely skeptical" that both controlling families would agree to that structure.

Hershey is controlled by a trust, the charter for which mandates that it maintain a majority stake in the company's stock. A Cadbury bid would require adopting a new charter, FT.com reported, citing anonymous sources. A source close to Cadbury said he didn't "really see a united front from the family to change the charter."

Hershey, best known for its chocolate bars and kisses, must also weigh U.S. antitrust concerns. That might relegate Hershey's takings only to Cadbury's non-chocolate assets, such as its chewing gum, which could meld with Hershey's Ice Breakers portfolio of gum and mints, FT.com said. Hershey's other non-chocolate confections include Twizzlers licorice and Jolly Rancher candy.

Due to its size, Ferrero faces challenges of its own in producing a bid that can top Kraft's offer, even with a partner. Ferrero likely would only be able to borrow up to $5 billion based on speculated annual earnings of $1.5 billion, a source told FT.com.

That leads to further speculation the parties may turn to private-equity market, perhaps led by investment banker JPMorgan, known to advise Hershey. JPMorgan has the heft to underwrite such a deal, one of the sources said, if Hershey and Ferrero were inclined to leverage themselves so.

Whatever the future holds, one thing is for sure, the bid to takeover Cadbury has gotten much more complicated. Things in the chocolate business haven't got this interesting since Willy Wonka issued a challenge in the hope of finding an heir to his fictional chocolate empire. That contest, however, ended in only one winner.
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