Mondelez Could Be Looking to Gobble Up Hershey

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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