Coverage: Mondelez offers to buy Hershey for $23 billion

Mondelez International Inc., which makes Oreo cookies and Cadbury chocolate, offered $23 billion on Thursday to buy Hershey Co. in a deal that would create the world’s largest candy company.

Liz Hoffman, Dana Mattoli and Dana Cimilluca of The Wall Street Journal had the news:

Still, Hershey shares surged 17% to $113.49 on news of the offer—first reported by The Wall Street Journal—remaining elevated even after the company rejected the bid, in an indication investors believe Mondelez won’t be discouraged. Mondelez shares gained 6% to $45.51, giving the snack giant a market value of more than $70 billion.

A takeover of Hershey, known for its namesake Kisses and chocolate bars, would face obstacles. Any deal would require the approval of the Hershey Trust, which holds 8.4% of its common stock and 81% of its voting power and has opposed a sale in the past.

A spokesman for the trust, whose board includes three Hershey directors, declined to comment.

In preparing its bid, which was disclosed in a private letter last week, Mondelez took steps to win over the trust. The Deerfield, Ill., company pledged to protect jobs, locate the merged company’s global chocolate headquarters in Hershey, Pa., and rename it Hershey, said a person familiar with the matter.

John Kell of Fortune examined why Hershey rejected the deal:

2. The Milton Hershey Trust is a takeover barrier

This trust ensures that no hostile bid can be successful as it controls 80% of the votes. Some analysts have thus speculated that Mondelez’s ultimate strategy is a defensive one, as the company might fear it could receive its own hostile bid. Consumer goods analyst Pablo Zuanic argues that there is “nothing wrong with Mondelez wanting to be a consolidator in confectionery or biscuits.” In fact, the Susquehanna International Group analyst says he supports category consolidators though he warns the integration track record for Mondelez has been “uh, mixed….”

3. Antitrust concerns are minimal

Wall Street has seen a lot of big blockbuster deals squashed by the Obama administration in recent years, but observers were quick to point out that a Mondelez-Hershey deal—if Hershey were to get on board—would likely not be subject to such intense scrutiny. Why? Regionally, the companies don’t overlap too much. At Hershey, nearly 88% of total revenue comes from the North American market. Mondelez only derives 24% of revenue from that region; Europe is a far larger market for the snacking giant, and it has sizable operations in the Latin America and Asia Pacific regions.

Greg Trotter of the Chicago Tribune explored whether a higher offer is forthcoming:

It’s unknown at this point whether Mondelez will redouble its efforts and up its offer. The initial offer price was for about $107 per share, which amounts to about $26 billion, according to some analysts. Reports of the offer shook up the food and candy industry for half the day and sent stocks of both companies upward. To some analysts, the merger of Mondelez and Hershey, the second- and fifth-largest candy companies in the world, respectively, made perfect sense. Others were surprised to see Mondelez emerging as a buyer, rather than a seller.

Before Hershey announced that its board had voted against the offer, some analysts warned that there could be challenges.

Erin Lash, a Morningstar analyst who covers both companies, said such an offer could potentially benefit both companies, considering Hershey is the leading chocolate company in the U.S., whereas Mondelez’s confectionary sales are primarily in other countries. But she noted that such a merger would have a significant hurdle to clear in gaining approval from the Milton Hershey School Trust, which holds more than 80 percent of the voting power in the company.

“When Hershey attempted to sell itself in 2002, school alumni as well as the Pennsylvania attorney general vigorously opposed a deal, and we fail to see how this time would be different,” Lash said in her analyst notes Thursday.