Not Likely Mondelez Will Remain 'As Is,' Susquehanna Sees 25% Upside

Susquehanna believes it's unlikely Mondelez International Inc MDLZ will remain "as is" over the next 12 months, with either Mondelez buying Hershey Co HSY or Mondelez itself being acquired by a larger F&B conglomerate.

In both cases, the brokerage estimate the upside for minorities north of 25 percent, while upgrading the stock to Positive from Neutral with a $60 price target (up from $46).

"If MDLZ is able to buy HSY (yes, turmoil at the Hershey Trust makes such an event more realistic than in the past), we estimate cost and top line synergies would create 25-30% upside for MDLZ (assuming a 20% premium to the current HSY share price)," analyst Pablo Zuanic wrote in a note.

A Mondelez-Hershey merger would result in a company with annual sales topping $36 billion. A potential combination would club Mondelez's Oreo, Cadbury, and Trident brands with Hershey's Reese's, and Kisses brands. But, earlier this month, Hershey rejected $107 per share offer from Mondelez.

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However, the analyst expects radical changes at the Hershey Trust over the next 18 months, including the composition of its Board and the way the Trust operates, making a MDLZ-HSY merger less unlikely than before.

The analyst noted that the Mondelez bid for Hershey is a defensive tactic. Late Friday, Mondelez appointed a new director Charles Bunch, who spent ten years in the HJ Heinz Board before HNZ was acquired by 3G/Buffett.

In addition, Zuanic also said it's possible Mondelez may be acquired by Kraft Heinz Co KHC amid the ongoing consolidation wave in the F&B space.

"A combination of cost cuts (do away with US DSD, consolidated the Northfield and Deerfield HQ, the overlap in the UK of Heinz/Cadbury), and asset divestitures (coffee) would make a$60 bid by KHC realistic and accretive," Zuanic highlighted.

If nothing happens in the M&A front, Zuanic expects limited downside in Mondelez shares due to cost savings targets and the current valuation discount to the group.

"On apples-to-apples valuation metrics, MDLZ trades at a 14% discount to the group. Our $60 price target assumes a 20% premium to account for M&A optionality," Zuanic added.