Nestle bid move boosts Hershey’s share value
Analysts and bankers expect the world food and drinks leader to bid aggressively for the famed maker of Hershey’s Kisses, although Nestle faces local opposition to the sale which might cost it its top credit rating.
Sources close to the situation said Nestle and several other firms toured the Hershey manufacturing facilities and started reviewing the company’s financial records in recent weeks.
Nestle shares dipped in early trading on investor fears it may be paying too much for Hershey and might have trouble digesting a fresh acquisition after several big deals in the last year.
“People are worried Nestle is going to overpay and about the opposition to the deal. These are two unknowns that are weighing on the stock,” said Bank Leu analyst Steven Frey.
Nestle shares recovered from early lows to 331.50 Swiss francs at mid-session, up 0.3%, underperforming its Swiss blue-chip peers and sector rivals.
Zuercher Kantonalbank said a $11.5bn Nestle offer for Hershey cited by the USA Today newspaper was at the upper end of expectations and initially weighed on shares.
Nestle refused to comment.
“Nestle does not comment on market fantasy,” a spokesman said.
Citing sources familiar with the offer, USA Today said Nestle presented a preliminary bid of $82 to $85 a share.
But sources said any bid for Hershey at this point was preliminary and negotiations could fall apart at any time. Nestle so far has only confirmed it was eyeing a possible deal.
A banker close to Nestle said the firm was aggressively pursuing Hershey, which he called a good strategic fit. “They tend to be aggressive bidders for good assets,” he said.
Both Nestle and Kraft Foods Inc have expressed serious interest in bidding for Hershey so far, sources said. Nestle, which has a weak position in the US confectionery market, is attracted to Hershey because of its position as the US leader in the sector and its better margins.
Hershey Foods stock, which traded at $62.50 per share just before news of a possible sale emerged last month, closed on Friday at $75.03, up 24 cents, on the New York Stock Exchange. Shares rose to $76.60 on early Monday trading on Instinet.
“It is clear it can be only Nestle and Kraft that are interested in Hershey as from the aspect of financial strength only these two have the chance,” said Rene Weber, analyst with Bank Vontobel.
Nestle brands include Nescafe coffee, Kit Kat and Friskies pet food. Kraft brands include Philadelphia cream cheese, Toblerone chocolate as well as Jacobs and Maxwell House Coffee. The Pennsylvania attorney general asked a state judge on Friday to prevent the trust that controls Hershey from moving ahead with its sale. This caused a few trust board members to waver in their support for the sale, according to some reports.
Rumblings in Hershey are the patriotic defence, said Vontobel’s Weber, adding local misgivings a sale could wreck the company town seemed misplaced because Nestle would probably let Hershey run the US chocolate business if a deal went ahead.
Nestle has been vacuuming up companies in the rapidly consolidating food sector and another multi-billion dollar deal could cost the company its top credit rating, although analysts say cash-rich Nestle can afford Hershey’s price tag.
Nestle Chief Executive Peter Brabeck said that maintaining the AAA rating that allows the company to borrow more cheaply than lower-rated rivals’ costs was not the firm’s sole aim.
“In the short term to lose its top rating will increase interest costs but in the long run if (Hershey) complements its portfolio then this is a better way to go,” said Leu’s Frey.
“The price of $82-85 would certainly be justified for Nestle and would not have a big negative impact on earnings before goodwill writeoffs,” Weber added. “This price seems realistic.”
Nestle said earlier in August it would buy Chef America Inc for $2.6 billion, just months after it said it would take over Dreyer’s Grand Ice Cream in a multi-billion franc deal. It bought pet care firm Ralston Purina in 2001 for $10 billion.
It is also thought to be interested in Pfizer Inc’s Adams unit and Novartis functional food brands.
“If there is a Hershey deal, there could be (credit) downgrades. People might think Nestle has been a bit too acquisitive and will have integration problems,” said Zuercher Kantonalbank market strategist Claude Zehnder.
There was also possible antitrust issues as a combined Nestle-Hershey operation would control more than 50% of the U.S. chocolate confectionery market.
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