Why We're Still Sweet on Hershey--and Mondelez, Too
Even without a union, these undervalued wide-moat names are attractive for their leading brands and entrenched relationships.
Since its initial interest surfaced two months ago, Mondelez (MDLZ) disclosed on Monday that it is dropping its pursuit of Hershey (HSY). It has been rumored the initial offer price was raised to $115 per share (from $107 originally)--which equates to $27 billion or 15 times EBITDA--however, in line with our prior assessment, this was still viewed as a bit low. We’ve maintained that assuming 3% cost synergies, an enterprise value/EBITDA multiple of 16-17 (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) seemed reasonable, implying a price tag of nearly $30 billion or $120 per share, about 15% above our valuation.
From a strategic perspective, we haven’t wavered from our stance that a deal could have been advantageous for both firms, affording Mondelez entry into the attractive U.S. chocolate space while also facilitating Hershey’s expansion beyond its home turf. But despite these merits, we weren’t convinced that even a higher price tag would make Hershey amenable to an agreement. Rather, we’ve long thought that the sizable hurdle to a deal was 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. We think this ultimately proved the demise to a tie-up.
Even with this news, we don't intend to change our $48 and $105 fair value estimates for Mondelez and Hershey, respectively. But with shares of both firms trading at a discount to our valuation, and in light of the leading brands and entrenched retail relationships each firm maintains, we think investors should keep shares of both wide moat names on their radar.
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Erin Lash does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.