Nestlé could look to Hershey as chocolate market gets a shake-up

Posted by Isobel Drake on 28th January 2010

The world’s largest food group, Nestlé, is expected by analysts to look at the prospect of acquiring Hershey in the years ahead as they see themselves fall down the confectionery pecking order.

The Swiss group typically maintains the lead or second position in their major categories marking their place as third in the chocolate sector behind Mars and a Cadbury-enriched Kraft as unfamiliar territory. As such, analysts believe they will look at a purchase of Hershey, albeit probably not this year.

The current structure of Hershey, which sees the Hershey Trust control the majority of voting rights, does not lend itself to a takeover but the confectioner may become more amenable to a deal if cost and competitive pressures begin to bite.

“We believe a deal for Hershey could be secured at around US$10-11 billion plus a $2 billion debt take-out,” analyst Deborah Aitken from brokers Bryan Garnier told Reuters.

Hershey looked into the prospect of purchasing Cadbury after Kraft made their move but, being just a little more than half the size of Cadbury meant the deal was never really a feasible option. And it is this Kraft-Cadbury deal that may end up hurting the American icon as Kraft may look to make inroads in the American marketplace with assistance from Cadbury brands. This is complicated, however, by the fact that Hershey is currently the distributor of Cadbury products in the US.

Nestlé has said no major acquisitions are on the cards in 2010 but has not ruled out ‘bolt-on’ deals.

“We have … said that we will continue to look for bolt-on acquisitions to reinforce our competitive position in the market. There may be opportunities from time to time but these are always going to be smaller deals and very geographic specific rather than large global brands. We don’t see the need to make any dramatic change in that strategy,” CFO Jim Singh said a few weeks ago.

And with a market capitalisation steadily edging toward $200 billion the Swiss firm could almost consider Hershey as a small deal.

There were rumours that Nestlé may make a combined bid with Hershey for Cadbury recently but Nestlé indicated that competition authorities would block any deal for Cadbury with them involved. However, competition issues are not as prevalent when it comes to Hershey as their main strength is America where Nestlé is not as strong.

“For Nestle, Hershey is the deal it would like to do. It would have no major anti-trust problems, address its weakness in U.S. confectionery and get back its licence to KitKat,” an industry insider told Reuters.