By Don Miller
Associate Editor
Money Morning

Hershey Co. (NYSE: HSY) and Italian-based confectioner Ferrero SpA are considering a possible bid for U.K. candy giant Cadbury PLC (NYSE ADR: CBRY), raising the potential for a costly bidding war. But should a battle take place, U.S. food giant Kraft Foods Inc. (NYSE: KFT) is still the odds-on favorite.

Hershey, the maker of Reese’s Peanut Butter Cups, said in a statement it’s “reviewing its options,” leaving open the door to an offer but not saying one would be forthcoming. Ferrero, the Italian maker of Tic Tacs and Nutella spread, said it was in “preliminary stages of evaluating its options in respect to Cadbury,” according to Reuters.

Neither company hinted that they were working together on a joint bid, one that most analysts doubt could top the hostile $16.2 billion cash-and-share offer from Kraft. After media reports by Reuters, the two were asked by the U.K. Takeover Panel to clarify their intentions.

Cadbury, which has repeatedly rejected Kraft’s bid as inadequate, saw its shares rise to their highest levels in almost a month yesterday (Wednesday), gaining 9.5 pence, or 1.2%, to 797.5 pence ($13.39) at 4:35 p.m. in London trading. Kraft’s offer is currently valued at about 726 pence ($12.20) a share.

Most analysts remain skeptical Hershey and Ferrero can outbid Kraft due to structural difficulties.

“There are many barriers to Hershey and Ferrero launching a formal offer. The degrees of freedom on financing aren’t high for either.” Martin Deboo, an analyst at Investec in London, told Bloomberg News.

Hershey is controlled by a charitable trust, and is much smaller than Cadbury, analysts noted. Ferrero is privately owned and has limited experience with acquisitions.

Complicating the deal for Hershey, which already carries a heavy debt load, are trust provisions that dictate a bid would need to be funded with debt rather than equity.

“The only way Hershey could finance a bid is if the trust decided to move to a single-class share structure, relinquishing its control and making it easier…to sell new stock,” Pablo Zuanic, an analyst at JPMorgan Chase & Co. (NYSE: JPM) in London, told Bloomberg. “We see that as unlikely.”

“The Hershey Trust needs to ensure that it can meet its charitable purposes and protect its long-term income … It will probably act conservatively and won’t want to see Hershey overpay and take on a lot of leverage for an acquisition,” a lawyer at a London law firm told Reuters, speaking anonymously.

For Hershey, which gets about 85% of its $5.1 billion in annual sales from the slow-growing U.S. confectionery market, a deal with Cadbury could give the company access to faster-growing gum and candy markets.

For Ferrero, whose sales are concentrated in Germany, Italy and France, a Cadbury merger would offer entry to the chocolate-loving British market.

The deal may also hinge on economies of scale, gaining all three companies more leverage in the cocoa market, where prices have climbed for four straight years, and are up 18% this year.

“Together, Cadbury, Ferrero and Hershey would gain good control of the cocoa market, which is the rationale of such a potential deal,” Arnaud-Cyprien Nana Mvogo, a merger-arbitrage analyst at Aurel BGC in Paris, wrote in a note to investors obtained by The Wall Street Journal.

On November 9, Kraft formally offered to buy Cadbury in a hostile takeover. But by reiterating, and refusing to raise, its original offer of Sept. 7, it may have opened the door to competing bids. Cadbury rejected both offers as “derisory.”

“Our offer is fair and attractive. And we remain confident we’re the best, most logical partner,” Kraft spokesman Michael Mitchell said Tuesday, according to a report in The Journal.

But Cadbury refuses to budge.

“We have always said that we would give proper consideration to any serious offer that delivers full value for the company,” a Cadbury spokesman said Wednesday. “Unless and until we find ourselves in that situation we have nothing to comment upon.”

In the end, no matter who wins the battle, Cadbury is likely to command a higher price.

“This will change Kraft’s psychology on the bid, and somewhat improves the probability of a higher bid from them,” Deboo said.

News & Related Story Links:

• Reuters:
  Ferrero, Hershey mull Cadbury move; Kraft seen ahead
• Bloomberg News:
  Hershey, Ferrero Mull Options on Kraft Target Cadbury
• Money Morning :
  Kraft Launches Hostile Bid for Cadbury
• The Wall Street Journal:
  Hopes Rise for Cadbury Bidding War
• Money Morning:
  Kraft’s Bid for Cadbury Not Sweet Enough

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