Hershey and Mondelez: We Don’t See a Tie-Up as Imminent, Given Persistent Hurdles

Key Morningstar Metrics for Mondelez International

• Fair Value Estimate: $75.00
• Morningstar Rating: 4 stars
• Morningstar Economic Moat Rating: Wide
• Morningstar Uncertainty Rating: Low

Key Morningstar Metrics for Hershey

• Fair Value Estimate: $210.00
• Morningstar Rating: 4 stars
• Morningstar Economic Moat Rating: Wide
• Morningstar Uncertainty Rating: Low

Bloomberg reported that Mondelez International MDLZ has approached Hershey HSY about a potential takeover. This would mark the second time in the past eight years that Mondelez sought a deal with the leading domestic chocolate manufacturer; the firm soured on its prior attempt within a few months.

Why it matters: Against a backdrop of waning top-line growth and on the heels of Mars’ announced tie-up with Kellanova K, much speculation has circulated about whether packaged food firms would embark on deal sprees.

• Shares of both operators have fallen over the past year on angst around rising cocoa costs, the growing adoption of obesity drugs, and regulations the incoming Trump administration could institute for health and wellness if Robert F. Kennedy Jr. has a seat at the table.

The bottom line: As any potential deal is far from certain, we don’t intend to change our fair value estimates for Hershey and Mondelez. In addition, we are holding firm on our Standard Capital Allocation Ratings for both manufacturers.

• Assuming 3% cost synergies and a high-teens enterprise value/EBITDA multiple, Hershey could amass a price tag of around $45 billion-$50 billion ($218-$247 per share).
• While this is north of the low-to-mid-teen multiples that have characterized deals in the space, we view a premium as warranted, given the low levels of private-label penetration in the confectionery aisle and the outsize profitability Hershey generates.

Coming up: From a strategic perspective, a deal could prove advantageous for both firms, affording Mondelez entry into the attractive US chocolate space while facilitating Hershey’s expansion beyond its home turf.

• However, with roughly 80% of the voting power held by the Milton Hershey School Trust, which depends on Hershey’s dividends to fund its operations, we’re skeptical a deal will ultimately get done.
• Further, any potential transaction would need the approval of the attorney general of Pennsylvania, which is unlikely.