NEW YORK — While it believes a takeover by Mondelez International, Inc. is unlikely, Credit Suisse does think drama surrounding the bid will spur “a new sense of urgency” at the Hershey Co. As a result, the equity research firm has raised its 12-month target price for Hershey to $110 per share, up from $91 previously.
Mondelez, East Hanover, N.J., in late June submitted an offer to acquire Hershey, Pa.-based Hershey for $107 per share, or about $23 billion.
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| Robert Moskow, research analyst with Credit Suisse |
“We believe that the drama of this take-out bid will spur a new sense of urgency at the Hershey Co. to boost shareholder value and improve fundamental performance,” Robert Moskow, research analyst with Credit Suisse, wrote in a July 20 report. “One could argue that the Hershey Trust’s 81% control of the stock obviates the need for a defense plan from Hershey management. But our view is that Hershey management will feel sufficient pressure from shareholders and its board to provide a palatable alternative to selling the business outright.”
Mr. Moskow said Hershey’s management has more options at its disposal than many investors may realize, including the ability to cull back its investment spending in emerging markets, initiate more stringent trade promotion guidelines, institute stricter zero-based budgeting processes, or use the Allan Candy acquisition as a catalyst to restructure the supply chain.
“Steps such as these won’t do much to reinvigorate top-line growth, but they would give more visibility to margin expansion and e.p.s. (earnings-per-share) growth,” he said. “In our experience management teams can sometimes leverage take-out speculation to further their case internally for more stringent measures to implement change. Hershey’s overhead expenses are over 300 b.p.s. higher than its food peer group as a percentage of sales.”
Mr. Moskow said Credit Suisse has taken the consensus view that Mondelez will raise its bid for Hershey to something closer to $120 per share, a price that would put more pressure on the Hershey Trust to approve of a sale. He also said Credit Suisse believes that the Pennsylvania attorney general’s investigation into the Trust will lead to further resignations of its board members. The potential for resignations may serve as a catalyst for Hershey to bring in outsiders with no ties to Pennsylvania, which may increase the probability of Mondelez striking a deal for the company, Mr. Moskow said. But with the power to block a sale still in the hands of the attorney general’s office, he said Credit Suisse still assigns a low probability to Mondelez achieving its objective.
