Hershey's Rejection Unlikely to Dampen Mondelez's Interest

In our view, the impending hurdle to a deal is that Hershey is a controlled company, with more than 80% of the voting power held by the Milton Hershey School Trust, which depends on Hershey's dividends to fund its operations. In support of our stance, when Hershey attempted to sell itself in 2002, school alumni and the Pennsylvania attorney general vigorously opposed a deal; this could still present hurdles in getting a deal done.

But, as with its pursuit of Cadbury nearly seven years ago, we doubt Mondelez will throw in the towel at this point. Assuming 3% cost synergies, an enterprise value/EBITDA multiple of 16-17 times seems reasonable. (This is north of the low- to midteen multiples that tend to characterize deals in the space, but warranted, given the low levels of private-label penetration in the confectionery category combined with the attractive profitability Hershey generates.) This implies a price tag of nearly $30 billion, or $120 per share, almost one fifth above our valuation.

A potential tie-up could be advantageous for both firms. It would enable Mondelez to finally gain entry into the attractive U.S. chocolate space, from which it's been essentially locked out, given that Hershey has held the rights to Cadbury's U.S. brands since 1988. Further, a deal could facilitate Hershey's expansion outside its home turf--where it has struggled--with the aid of Mondelez's vast geographic network.

However, as a deal is far from certain, we don't intend to change our $48 and $103 respective fair value estimates for Mondelez and Hershey. In addition, we still believe the leading brands and entrenched retail relationships that the firms maintain independently support our wide moat ratings.

Morningstar Premium Members gain exclusive access to our full analyst reports, including fair value estimates, bull and bear breakdowns, and risk analyses. Not a Premium Member? Get this and other reports immediately when you try Morningstar Premium free for 14 days.