Think of it as a beautiful, expensive pinata. One of the largest confectionery producers in the world, Nestle (NASDAQOTH:NSRGY), is primed to conduct a "strategic review" of its U.S. candy assets, a big portfolio that contains such well-recognized products as Butterfinger, Baby Ruth, and Gobstoppers. The process might very well result in a sale, Nestle said.
It's early days, and we can't know whether the candy unit will ultimately be divested. Still, it's worth looking at some of the leading companies in the sector to see if they might be potential buyers.
If a sale is effected, the purchaser would need access to considerable financial resources to buy the unit. Nestle says that it sold roughly 900 million Swiss francs ($930 million) worth of candy in the U.S. last year.
On top of that, the asset will almost certainly command a tasty premium. According to recent data from Euromonitor cited by Bloomberg, Nestle holds the No. 4 position on the U.S. market, with a share of just over 5%. And the market is growing -- according to other Euromonitor data cited by Fortune, candy sales here rose from $29.6 billion in 2011 to $33.7 billion last year.
One entity that could probably secure enough financing is Mondelez International (NASDAQ:MDLZ). After all, the company was ready, very willing, and apparently able to fund a $23 billion play last year for classic American confectioner Hershey (NYSE:HSY), which was ultimately dropped.
In spite of that audacious play, Mondelez isn't in the strongest financial position. At the end of its most recently reported quarter, it had just over $1.3 billion in cash on hand and was burdened by nearly $13 billion in long-term debt. Shareholders might not be too thrilled if Mondelez were to go for another big-ticket acquisition, no matter how sweet the prize.
Speaking of Hershey, it has a similar cash/long-term debt imbalance ($235 million and almost $2.4 billion, respectively). If it had the desire and means to scare up a winning bid, though, it would rocket to the top of the candy pile. According to Euromonitor, Hershey is the No. 2 confectioner on the American market, with a share of 23%. That's just behind the top dog, privately held Mars, with 25%.
That leads to the question of whether Nestle's American candy line-up would be of interest to Mars. It's hard to gauge the company's financial suitability since it's a privately held business, but we can make an assumption based on habit.
And lately, that has been to buy assets outside of the candy category. In January, Mars agreed to pay $7.7 billion to buy veterinary services company VCA, adding to an already-sizable portfolio of pet care assets. The VCA deal came less than three years after Mars ponied up $2.9 billion to buy the Iams, Eukanuba, and Natura pet food lines from Procter & Gamble.
Those assets are far away from the candy and gum products on which Mars built its business. The company just doesn't seem eager to take whacks at candy-stuffed pinatas these days, so I wouldn't put money on it making a run at Nestle.
On a roll
Given the preponderance of cheap money these days, it's possible that a resourceful smaller producer could line up a compelling offer on its own for the Nestle's U.S. candy business.
"Smaller producer" and "U.S. candy business" ring a bell for Tootsie Roll Industries (NYSE:TR), which, like Hershey, has gone the acquisition route to build a portfolio of known brands outside of its namesake product. It also has a cleaner balance sheet than Mondelez and Hershey.
Tootsie Roll is a small fry next to them, though, with $521 million in 2016 sales compared to Mondelez's nearly $26 billion, and Hershey's over $7 billion. Plus, its sales have been eroding over the past few fiscal years, and profitability hasn't risen significantly.
Meanwhile, it's a Dividend Aristocrat (one of the few companies that have raised their payouts at least once annually for a minimum of 25 years in a row). As such, the financing requirements of a massive asset buy could put that investor-attracting status in jeopardy.
Tootsie Roll might just favor shoring up its own business rather than attempting a huge, expensive swallow of Nestle's brands.
Eyes on the prize
I should emphasize here that there is no guarantee Nestle's American candy line will ultimately be offered for sale. We'll know more once the company concludes the strategic review, which it expects to do by the end of this year.
Regardless, we can be sure that at least some of the players in the sector are paying close attention -- and perhaps already concocting plans to bid for the unit. It's a big, temptingly stuffed pinata, after all.