Once again, Hershey (NYSE:HSY) has rejected an attempted buyout, but a settlement reached between its board of trustees and Pennsylvania's attorney general could mean another takeover offer may soon be in the works.
A not-so-sweet deal
Late last month, Hershey's board of directors unanimously rejected a $23 billion merger offer from global snack maker Mondelez International (NASDAQ:MDLZ). The deal would have combined the world's second largest confectionery company, Mondelez, with the fifth largest to create the leading international candy and snack company with an 18% share of the market.
Hershey offered no explanation for the rejection, only that it saw nothing in the bid that warranted further discussion with Mondelez.
But the Hershey Trust has resisted takeover attempts in the past, such as when gum maker Wm. Wrigley Jr. offered to buy the chocolate company in 2002 for $12 billion. Hershey rival Mars eventually acquired Wrigley for $23 billion in 2008.
Hershey also explored the possibility of being acquired in 2007 by U.K. rival Cadbury and then coming to Cadbury's rescue three years later when it was being pursued by Kraft Foods, but dissension between the company and the trust caused both efforts to go nowhere. Kraft, which became Mondelez, ended up buying Cadbury.
Hershey sells Cadbury candy under license here in the U.S., while Mondelez sells the candy internationally, and it was that affiliation that formed the basis for the snack company's bid for the chocolate maker.
However, a deal between the Pennsylvania attorney general and the charitable trust over allegations of conflicts of interests and overcompensation of trustees could change the composition of the organization enough that future merger deals might not run into the same brick wall.
Trust but verify
The Hershey Trust was established in 1905 by company founder Milton Hershey and his wife. It owns over 8% of Hershey common stock, but controls some 81% of the voting shares and oversees not just the chocolate maker but also the Hersheypark theme park, a minor league hockey team, and a school for underprivileged children established in 1909.
But it has operated over the years as a fractious charity that has been embroiled in scandal, most recently when the trust's chief compliance officer was put on leave after it was revealed the board spent $4 million investigating insider trading charges and conflicts of interest surrounding him. In April, trustee John Estey, an aide to former Pennsylvania Gov. Edward Rendell, pleaded guilty to wire fraud attributable to campaign contributions. The trust has also been accused of lavish trustee compensation and frivolous spending, such as the $12 million it spent to buy a golf course, only to close it, because it was losing money.
According to Reuters, the attorney general's office has reached a preliminary settlement with the trust. The agreement, which helps Hershey avoid a legal battle, will limit trustee terms to 10 years, while three current trustees will be forced to resign by the end of 2016 as they will have reached or far exceeded that service threshold.
A chocolate mess
Fresh blood on the trustee board could put an acquisition back on the table, though even if the trust agreed, the attorney general still could step in and squash any takeover. That's because the trust is legally obligated to continue financing the Milton Hershey School that is supported by Hershey's profits. So if the attorney general believes the school's funding might be in jeopardy, it could step in. When Wrigley attempted to acquire Hershey, the attorney general's office also sued to block the deal.
Many observers believe the Hershey Trust to be a sclerotic organization that has thwarted efforts to improve the candy maker. With new faces serving on the trust, Hershey itself may be in play again. Nestle has been rumored as a potential suitor, but it's possible Mondelez will return with a new offer too, as analysts think Kraft Heinz might be in pursuit of the snack maker, and Mondelez will want to fend off any acquisition attempts itself by gobbling up Hershey.
Hershey investors may just find themselves looking at an even sweeter deal in the near future as rivals try to shore up their own bottom line.