Please ensure Javascript is enabled for purposes of website accessibility

Warren Buffett Is Watching This Big Deal Very Closely

By Alex Dumortier, CFA – Jul 1, 2016 at 11:25AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

As Mondelez International goes after Hershey Co, there are all sorts of reasons this deal would make sense for Warren Buffett's Berkshire Hathaway Inc.

Image source: The Motley Fool.

Brexit: Is it over yet? U.S. stocks could put together four straight days of gains, with the benchmark S&P 500 (^GSPC -0.03%) and the Dow Jones Industrial Average (^DJI 0.45%) (DJINDICES: $INDU) up 0.35% and 0.26%, respectively, at 11:15 a.m. EDT on Friday. Still, the bond market is reminding us that all is not completely right in the world, as U.S. Treasury yields reached historic lows, with U.S. government able to borrow money over 30 years at roughly 2.2%. But that's the height of normalcy compared to Switzerland, where, as of this morning, the entire stock of government debt is trading at negative yields, with maturities stretching out to 2064! (See our Tweet of the day, below.)

Shares of Hershey Co are lower on Friday after gaining 17% yesterday on the announcement the company had received (and rejected) a takeover offer from Mondelez International Inc valuing the Hershey, Penn.-confectioner at $107 per share.

Hershey-Mondelez: Warren Buffett is following this deal closely

"How much longer can Hershey defy the march of time? The confectioner is an anachronism," laments the Financial Times Lex column in today's paper. The company has summarily rejected Mondelez's $107 per share offer, stating "it provided no basis for further discussion."

Hershey's structure is a bit old-school: The Hershey Trust Company, chartered in 1905 to endow the Hershey Industrial School (now the Milton Hershey School), controls 81% of the chocolate maker's voting rights but just 8.3% of the common shares.

The trust is deeply conservative when it comes to deal-making. Since the turn of the century, it has forced Hershey to walk away from the altar twice: the last time in 2007, when it squashed what would have been a transformative deal with Cadbury plc (which was later absorbed by Mondelez).

Wary of this history, Mondelez has shown that it is sensitive to the trust's concerns, promising in a letter to Hershey's board to preserve local jobs. Mondelez's plan also has the combined company renaming itself Hershey and keeping Hershey as the headquarters for the chocolate activity.

Promises vs. a demonstrated track record

Which is where we get into Buffett's territory. Mondelez can make all the promises it wants, but it simply doesn't have Berkshire Hathaway's track record of not interfering with a company's business after it has been acquired, leaving them with near-total autonomy. That could give Berkshire Hathaway a decisive, non-economic advantage in a sale (Berkshire, in any case, would refuse to participate in an auction).

Furthermore, we know Buffett is a fan of branded food and beverage companies, which have pricing power based on customer loyalty. At Berkshire's 2008 annual meeting, a shareholder asked Buffett to compare Berkshire's oldest non-insurance company, See's Candies (high profitability, low growth), to Swiss chocolate maker Chocoladefabriken Lindt & Spruengli AG (lower profitability, higher growth). Buffett replied:

We want a company with a durable advantage, which we can understand, a management we can trust, at a good price. We've looked at every confectionary business. We can sometimes take action ...

On the other hand, perhaps Buffett will simply sit back and wait for his partners at 3G Capital to consolidate the confectionery business the way they have done with the global beer industry. According to the Financial Times, M&A bankers say Mondelez's bid reflects a concern that it could find itself the subject of interest from the Kraft Heinz Co, which is jointly controlled by Berkshire and 3G. As Buffett quipped in front of the Heinz stall at last year's annual meeting: "I like big deals, but they [3G Capital] really like big deals."

Tweet of the day

From our own TMFHousel:

What a time to be alive. Anything above zero is now attractive.

-- Morgan Housel (@TMFHousel) July 1, 2016

Alex Dumortier, CFA, has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Berkshire Hathaway (B shares). We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Dow Jones Industrial Average (Price Return) Stock Quote
Dow Jones Industrial Average (Price Return)
$34,347.03 (0.45%) $152.97
S&P 500 Index - Price Return (USD) Stock Quote
S&P 500 Index - Price Return (USD)
$4,026.12 (-0.03%) $-1.14

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 11/28/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.