Not So Secret Meetings Between Hershey and Cadbury

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One way to fight a hostile takeover is to find a "white knight". Cadbury (CBY) is doing just that in clandestine meetings with Hershey (HSY). The meetings are no longer secret now that several media outlets have reported on them. This news is yet another sign that Kraft (KFT) faces an uphill battle in its bid to buy Cadbury.%%DynaPub-Enhancement class="enhancement contentType-HTML Content fragmentId-1 payloadId-61603 alignment-right size-small"%% It's worth looking at the problems Hershey faces as it considers making an offer for the U.K. firm. Hershey's market cap is under $9 billion. Kraft's offer for Cadbury is $16.6 billion. Hershey would certainly have to offer more than that to clinch a deal. Hershey's sales in the last quarter were only $1.5 billion and operating income was $280 million.

Hershey has very little cash on its balance sheet according to its 10Q for the period ending October 4th. Its cash and cash equivalents were $119 million, but the company had very modest long-term debt of $1.1 billion. That means that it has the opportunity to increase its debt load substantially.

Hershey may have one important advantage. The Hershey Trust owns 80% of the public company's voting shares and a third of Hershey's outstanding shares. A nod from the Trust would allow Hershey to make a bid; a "thubs down" would kill the chance of an offer.

Hershey's road to a deal with Cabdury could also move in another direction. Bruce Wasserstein, the iconic investment banker died last year, but his methods live on; Cadbury could take on a large debt load and buy Hershey. That new debt would make Cadbury much less attractive to Kraft, and Cadbury would become one of the largest food companies in the world with a substantial asset base in the U.S.
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