Morningstar

Mondelez Could Be Looking to Gobble Up Hershey

But the deal is far from a slam dunk, says Morningstar's Erin Lash.

Securities In This Article
The Hershey Co
(HSY)
Mondelez International Inc Class A
(MDLZ)

According to several media outlets, wide-moat

Mondelez's interest in the U.S. chocolate space (which has just 1% private-label penetration) is far from a surprise. Despite its tie-up with Cadbury more than six years ago, Mondelez has essentially been locked out of the U.S. chocolate category because Hershey acquired the rights to the Cadbury U.S. brands in 1988 in a deal that management has called "ironclad."

It has been rumored the initial offer price is $107 per share--which equates to $26 billion or 15 times EBITDA--but given the potential synergies, we view this as a bit low. Assuming 3% cost synergies, we think an enterprise value/EBITDA multiple of 16-17 times (north of the low to mid-teens 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) seems reasonable, implying a price tag of nearly $30 billion or $120 per share, almost one fifth above our valuation.

We don't intend to change to our $48 and $103 fair value estimates for Mondelez and Hershey, respectively, because a deal is far from certain at this point. We still believe the leading brands and entrenched retail relationships the firms maintain independently support our wide moat ratings.

We think the one 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. When Hershey attempted to sell itself in 2002, school alumni as well as the Pennsylvania attorney general vigorously opposed a deal, and we fail to see how this time would be different.

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About the Author

Erin Lash, CFA

Sector Director
More from Author

Erin Lash, CFA, is a sector director, AM Consumer, for Morningstar*. In addition to leading the sector team, she covers packaged food and household and personal care companies. Beyond managing a team of nine analysts and associates covering an array of consumer firms, Lash also conducts fundamental analysis of 13 multi-billion-dollar market capitalization firms in the packaged food and household and personal care space.

Before joining Morningstar in 2006, Lash spent four years as an investment analyst covering retail, transportation, and technology firms for State Farm Insurance. In this capacity, Lash analyzed financial statements, business strategy, and fundamentals of owned companies and potential investments, presenting her recommendations based on this analysis to State Farm portfolio managers for ownership consideration.

Lash holds a bachelor’s degree in finance from Bradley University’s Foster College of Business. She also holds a master’s degree in business administration, with concentrations in accounting and finance, from the University of Chicago Booth School of Business. Lash has completed the Chartered Financial Analyst® designation. She ranked second in the food and tobacco industry in The Wall Street Journal’s annual “Best on the Street” analysts survey in 2013, the last year the survey was conducted.

* Morningstar Research Services LLC (“Morningstar”) is a wholly owned subsidiary of Morningstar, Inc

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