Market Overview

Citi Analysts Dubious Of Hershey Takeover Rumors

Share:
Citi Analysts Dubious Of Hershey Takeover Rumors
Related HSY
Domestic Fair Trade Label Set To Enrich Local Economies, Expand Retailer Options
Could An Ouster Of Mondelez's Irene Rosenfeld Mean A Deal For Buffett's Berkshire?

Citi dismissed the recent takeover rumors of Hershey Co (NYSE: HSY) by Nestle SA (ADR) (OTC: NSRGY), saying it is "unlikely" due to the unique company specific factors, mainly the control of the Hershey Trust and Pennsylvania law.

However, Citi sees see other companies such as Kellogg Company (NYSE: K), General Mills, Inc. (NYSE: GIS) and Mondelez International Inc (NASDAQ: MDLZ) as more likely takeover targets.

Why A Change Is Unlikely

"The multitude of stakeholders involved would have to be perfectly aligned for any potential transaction, which to us seems like a large challenge to overcome," analyst David Driscoll wrote in a note.

Related Link: Hershey Shares Progress On Social Responsibility Commitments

Driscoll said the key roadblock to a Hershey buyout is the Hershey Trust, which owns 34 percent of shares as a trustee. "Critically though, due to supervoting rights on class B stock, the entity actually has about 80 percent voting control," Driscoll highlighted.

Trust Makeup A Huge Factor For Hershey

Driscoll recalled a "last-minute scuttling of a deal in 2002 with Wrigley," which subsequently resulted in the removal of board members in favor of the deal and a June 2008 public statement making it clear the Trust remained committed to retaining its controlling interest.

The analyst noted that the Penn. Attorney General is seeking the resignation of three of the Trust's long-standing board members; any board changes could alter outcomes.

As for now, however, the analyst sees "no real evidence that the fundamental view of the Trust has shifted, and as such, view a sale as unlikely."

Further, Pennsylvania law gives authority to the state's attorney general to stop any transaction that would result in the Trust losing its voting control.

Related Link: Do Chocolate Trends Help Hershey?

"So even if the Trust wants to sell, it still has to get buy-in from the AG. However, what elected official wants to be perceived as encouraging potential job losses, and to us, creates another barrier to any HSY takeover deal," Driscoll elaborated.

The analyst noted that a potential takeover of Hershey by another major chocolate company would have difficulty receiving DoJ approval given the highly concentrated market.

"If the market is defined as the broader U.S. Candy, Mint, & Gum category, a deal between two main confection players would likely generate scrutiny from the DoJ, but given that the market is moderately concentrated, there could be wriggle room for a deal," Driscoll added.

Driscoll has a Buy rating and $102 price target on the stock.

At the time of writing, shares of Hershey were down 1 percent at $95.62.

Latest Ratings for HSY

DateFirmActionFromTo
Feb 2017Societe GeneraleUpgradesSellHold
Feb 2017Argus ResearchUpgradesHoldBuy
Feb 2017Deutsche BankInitiates Coverage OnHold

View More Analyst Ratings for HSY
View the Latest Analyst Ratings

Posted-In: Analyst Color News Price Target Reiteration M&A Analyst Ratings Movers Trading Ideas Best of Benzinga

 

Related Articles (GIS + HSY)

View Comments and Join the Discussion!