The $23 billion Mars Inc.-Wm. Wrigley Jr. Co. deal has kicked off consolidation in the confectionery space, leaving Cadbury Schweppes plc under pressure and exposed as a target. With Cadbury
set to split its U.S. drinks business from its confectioner operations in early May, the timing could be right for a strategic to make a move. There are two potential suitors that may want to gobble up Cadbury: Hershey Co. and Kraft Foods Inc. David Palmer, an analyst at UBS Investment Research, who released
a report Tuesday on the Mars-Wrigley implications, offered The Deal some insight, including the possibility of Kraft divesting assets to buy Cadbury.
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The acquisition of Cadbury would be a natural move for Kraft, which also owns brands such as Oreo, Lu, Newtons, Nabisco, Chips Ahoy and Toblerone, to scale up its international business. Plus, Kraft's confectionery business overlaps with Cadbury's in 80% of international markets.
"If Kraft wants to become bigger internationally, buying Cadbury would do that. They just bought Danone's biscuit business, but if their hand is forced they may go for it," he said. "They may sell some sauces, condiments or dressings, and Heinz might be a buyer of these."
Palmer did not speculate as to which brands Kraft might unload, but it owns sauces such as A1, Kraft dressings and mayonnaise, and ketchup.
However, Kraft wouldn't be the only bidder for Cadbury as Hershey also stands to gain from buying its British rival. According to Palmer's report, the Mars-Wigley combination holds a 26% market share versus a 23% advantage over Hershey in the North American confectionery market. Hershey is one of Cadbury's biggest competitors in the North American market. The combination could up Hershey and Cadbury to 30% over the Mars-Wrigley 26%. However, an acquisition of Cadbury by Kraft could potentially, "sway the balance of power," Palmer said.
This being the case, Hershey has to make a move. However, the Pennsylvania-based company faces a major hurdle: its ownership structure, which has proved a problem to dealmaking in the past. Hershey's controlling shareholder is a charitable trust, the Milton Hershey School Trust. Hershey's tried in 2002 to merge with Wrigley in a $12.5 billion deal that would have led to the trust's exit, but legal intervention led to a change in trustees. The new trustees are committed to keeping control, so any deal would have to avoid dilluting the trust's stake. However, Hershey Trust's chief executive Robert Vowler, Hershey's top shareholder, will retire in April 2009. Consequently, Hershey might strike up a joint venture with Cadbury similar to the SABMiller plc and Molson Coors Brewing Co. venture, notes Palmer.
"Arch enemies can get together in a creative deal. Hershey desperately needs to find synergies and other sources of growth in order to compete. They are in need of a deal, and if Hershey will not sell itself, then they will be stuck between a rock and a hard place," Palmer said. - Maria Woehr
See Dealwatch: Confectioners: Mars, Wrigley, Cadbury and Hershey
See Dealscape: Mars chews up Wrigley
