Cadbury For Sale: Where is Hershey?

Do you have a sweet tooth? A personal weakness, perhaps, for the chewy flavor of a chocolate bar?

If you are indeed a chocoholic, and if you wish to own a 185 year old firm that produces your favorite product, then please contact Cadbury immediately. The company is searching for a buyer, and even its old friend and ally Hershey is unable to provide it with any assistance.

Cadbury’s problem is an unsolicited takeover bid from Kraft, the huge food conglomerate. Market pundits are now debating whether Kraft’s bold offer is a good sign or a bad omen for our economy. Fans of chocolate crème eggs and dairy milk bars, though, are uniformly aghast at the prospect of the purveyor of Velveeta Cheese and Jello-O gaining control of their favorite snacks. Thus, Cadbury would certainly take your call.

Good News and Bad News

The main players in this theatrical drama are two of the world’s oldest and best known manufacturers of consumer foods. The femme fatale is Cadbury plc, the world’s largest producer of candy that was founded in 1824 by John Cadbury as a Birmingham based coffee, tea, and hot chocolate business. And the unwanted paramour is Kraft Foods, Inc., the world’s second largest food and beverage company whose 1903 Chicago origins stretch back to James Kraft’s door-to-door cheese business.

Some market optimists believe that Kraft’s unsolicited takeover bid is a sign that our global investment markets are returning to normal. And many American workers are pleased that a successful American manufacturer is seeking to buy out a foreign competitor, thereby reversing the direction of many similar recent transactions. And yet some financial analysts note that Kraft may have simply been emboldened by Cadbury’s low stock price, which had plummeted in tandem with the global capital markets since peaking in Spring 2007.

As soon as Cadbury received Kraft’s unwanted proposal, it firmly rejected the offer and began searching for alternatives. That’s when its joint venture partner Hershey entered the story, a firm with little to gain and much to lose if Cadbury is unable to elude Kraft’s embrace.

Company Town

The Hershey Company, of course, is America’s largest chocolate manufacturer and a dominant presence in the town of Hershey, Pennsylvania. After producing and selling various candy products in Philadelphia and New York City since 1876, Milton Hershey – like James Kraft – founded his eponymous firm in 1903. Hershey has since grown to become one of the most valuable brands in America and worldwide.

But unlike Kraft, which has undergone numerous mergers with global firms like Philip Morris, Nabisco, and General Foods over the years, Hershey has remained a comparably small company that is ensconced in its namesake rural town. In fact, Hershey doesn’t even place its name on many items that it produces for American customers. All Cadbury products produced in the U.S., for instance, are actually manufactured by Hershey in Pennsylvania, a lucrative partnership that may not survive a Kraft acquisition.

In other words, Cadbury’s American chocolate bars are actually Hershey bars, made in Hershey plants under a global licensing agreement. That makes Hershey a logical suitor for its besieged British ally, but Hershey’s unique ownership and governance structure are standing in the way of a successful courtship.

The Hershey School and Hershey Trust

Most large food conglomerates, like Kraft and its larger competitor Nabisco, are publicly traded entities with access to the global capital markets and an ownership base that simply wants them to maximize profits. Thus, when such firms find opportunities to grow through acquisitions, they raise money from their investors and employ those funds to purchase their target firms.

Hershey, though, maintains a very different ownership structure. Much of its stock is not held by public investors at all; instead, it is owned by an investment trust company that was established by Milton Hershey to finance a free boarding school for children from disadvantaged backgrounds. The school still provides free education to such children today, and relies heavily on earnings from its Hershey holdings to finance its operating activities.

And therein lies the obstacle to a Hershey takeover of Cadbury. Hershey cannot simply justify an acquisition by demonstrating that it would enhance its stock market value. Instead, it must cater to the concerns of the Hershey School and Trust directors, who inevitably ask “How would The Hershey Company pay for Cadbury? Would it issue new stock to public investors, and/or to Cadbury’s existing investors? And would those investors be more interested in earning profits than in financing a non-profit school?”

Unfortunately for Cadbury, unless Hershey can find satisfactory answers to these questions, it is unlikely to deter a Kraft takeover bid with one of its own. And unless Cadbury finds another suitor, a firm that has been entrenched in British commerce since the early 19th century may not survive much longer in the 21st century.