Hershey May Be Preparing a Sweeter Bid for Cadbury

According to a report from the Financial Times, Hershey (HSY) is preparing a solo bid for Cadbury (CBY), which is already fending off a hostile offer of $16.9 billion from Kraft Foods (KFT). With a Jan. 23 deadline for offers looming, a bid from Hershey may come by next week.To succeed, Hershey will likely need to top Kraft's offer, which will be a huge financial undertaking for the candymaker, given that it would be at least twice the company's market cap. Oh, and the shares of Hershey have been sinking since late October, going from $40.88 to under $37.

But if Hershey can muster up a bid, this would certainly be good news for Cadbury, which is working hard to get a higher valuation and one that has a large cash component. This is the push-back Kraft CEO Irene Rosenfeld is getting right now as she is in London trying to convince shareholders to accept her bid. Interestingly enough, some investors have declined meetings.

But as for Hershey, the reception is likely to be much nicer. Both companies have similar cultures. After all, Hershey is essentially controlled by a charity and has a deep appreciation for a company's heritage. Cadbury shareholders are said to prefer the idea of selling to Hershey.

Financing Could Be Tricky

Moreover, a Hershey-Cadbury combination would be a global powerhouse. Cadbury is the No. 2 confectionery business in the world, behind Mars-Wrigley, with brands like Dairy Milk chocolate, Trident gum and Halls. The company also has a thriving business in emerging markets such as India and Mexico.

While all this sounds compelling, the problem is financing. Even though credit markets have loosed up, it still isn't easy to round up billions of dollars for a mega-bid. And what if Kraft proposes a counteroffer, making the acquisition even more expensive?

Hershey has retained JPMorgan Chase (JPM) and Bank of America (BAC) to get a commitment on the debt financing. However, to keep its investment-grade credit rating intact, the company will need to raise a substantial amount of equity. The Hershey Trust, which holds a controlling interest in the company, has agreed to pony up $1.25 billion, and there may be interest from major private-equity firms.

Complex Integration Challenges

To help with these efforts, Hershey has hired Byron Trott, a former Goldman Sachs (GS) investment banker, to seek out investors. His client list includes big names like Warren Buffet (who, by the way, is the largest shareholder in Kraft).

Yet, these efforts may not be enough. For example, Hershey may still have to sell off divisions to raise more cash.

Of course, Hershey will inevitably encounter complex integration challenges if it does purchase Cadbury. Maybe this is why competitors Nestle and Ferrero have both said they won't chase the deal. Perhaps they realize that while Cadbury is an attractive asset, the costs and risks of such an acquisition are staggering.
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