Hershey Slides After Mondelez Abandons Takeover Talks

Shares of Hershey (HSY) dropped in afternoon trading after Mondelez International (MDLZ) announced that it terminated merger talks with the confectioner.

WHAT’S NEW: After the market close yesterday, Mondelez said that it ended discussions with Hershey regarding a potential combination of the two groups. Mondelez chairman and chief executive officer Irene Rosenfeld said that the company decided that there was “no actionable path forward” to a deal with the U.S. candy manufacturer after “taking into account recent shareholder developments” at Hershey. “While we are disappointed in this outcome, we remain disciplined in our approach to creating value, including through acquisitions, and confident that our advantaged platform positions us well for top-tier performance over the long term,” Rosenfeld added. Two months ago, Hershey’s board of directors unanimously rejected Mondelez’s reported takeover offer of $107 per share.

WHAT’S NOTABLE: After the official announcement, Dow Jones reported that Mondelez had increased its bid for Hershey to $115 per share last week before dropping such efforts. Hershey said that price talks would have to start at $125 per share and that no deal could take place before its Trust board is reconstituted, the report said, noting that the Trust board likely won’t be reconstituted until next year. This morning, CNBC’s David Faber reported that combination talks between the two companies ended when Hershey established its $125 starting price point.

STREET RESEARCH: Commenting on the news, Credit Suisse analyst Robert Moskow said that the abandoned deal between the two companies could lead to “material changes” at the intended target and occasionally accelerated investor value creation. Moskow said that Hershey’s board now has a “fiduciary duty” to build a strong business case with the management team for why it can create value independently rather than combine with a multinational rival. The analyst added that he believes that Hershey should look into accelerating its margin targets, rekindling its consumer-demand framework, or selling China into a joint venture. Moskow kept a Neutral rating and $112 price target on Hershey. In addition, Stifel analyst Christopher Growe said while he was “quite enamored” by the strategic rationale of a Hersey/Mondolez deal, he does not believe another bidder will likely emerge for Hershey and that Mondelez’s challenge in pursuing a takeover will likely dissuade other suitors from making an attempt. The analyst said that Nestle (NSRGY) could still be an interested party in Hershey assets, but it would likely meet the same challenges Mondelez did. Growe noted that there are “numerous obstacles” to consider when weighing an acquisition of Hershey, namely that the Trust controls about 80% of the voting power and the Pennsylvania Attorney General holds authority over the Trust. The analyst maintained a Hold rating on Mondelez, noting that the stock could rise to the mid-to-upper $40s as investors shift focus on the potential of a combination with Kraft Heinz (KHC).