Hershey, Cadbury to Combine?

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Mars's Wrigley Purchase May Push Hershey, Cadbury to Combine
By Josh Fineman and Chris Burritt

April 29 (Bloomberg) -- Hershey Co., the biggest U.S. chocolate maker, and Cadbury Schweppes Plc may be forced to merge after Mars Inc. agreed to buy Wm. Wrigley Jr. Co. for $23 billion to create the world's biggest candy maker.

Combining Hershey's namesake chocolate bars and Cadbury's Trident gum and Certs mints would create a company with 15.6 percent of the world's candy market, pushing it past the 14.1 percent share held by Mars and Wrigley.

Hershey has lost market share to Mars the past two years, and is confronting rising costs for cocoa, energy and milk. The largest U.S. chocolate maker reported first-quarter profit dropped 32 percent last week, while Cadbury, which plans to spin off its Dr Pepper Snapple Group Inc. drinks May 7, has reported declining earnings since the second half of 2006.

``It could prompt them to come back to the table again and revisit the potential,'' said Matt Arnold, an analyst with Edward Jones & Co. in St. Louis, who advises investors to buy Hershey shares. The combination of Wrigley and Mars ``is a much stronger competitive threat long term to Hershey,'' he said.

Hershey's last attempt to combine with a rival failed when the charitable trust that controls the chocolate maker cancelled a 2002 auction that attracted bids from Wrigley, Cadbury and Nestle SA. Last year, the trust discussed how to merge Hershey with Cadbury without decreasing the trust's ownership, according to the Wall Street Journal.

Tim Reeves, a spokesman for the trust, declined to comment. The Trust was established by founder Milton Hershey and his wife, Catherine, in 1909, and exercises voting rights on behalf of the private Milton Hershey School.

Hershey rose $1.61, or 4.6 percent, to $36.35 in New York trading, while Cadbury climbed 15.5 pence, or 2.8 percent, to 579 pence in London.

More Sales

The combination of Mars and Wrigley will have $27 billion in annual sales -- including pet food -- compared with Hershey's $4.9 billion in annual sales and Cadbury's 8 billion pounds ($15.9 billion).

Mars and Chicago-based Wrigley together will control almost 28 percent of the U.S. candy market, eclipsing Hershey's 24 percent share of consumer purchases, according to Euromonitor International Inc. in Chicago, citing 2006 sales. Cadbury is the world's biggest candy maker with 10.1 percent share.

``Not only do we believe that it is extremely unlikely that Cadbury would make a successful bid for Hershey, but we do not see other potential suitors either,'' Alexia Howard, an analyst at Sanford C. Bernstein, who advises investors to sell the shares, wrote in a note today.

Health Food

Possible suitor Nestle is focused on healthy products and Kraft Foods Inc. sold its Lifesavers and Altoids businesses to Wrigley in 2005 to exit the U.S. candy market, Howard said.

Still, the need to compete with a larger competitor may make it more difficult for Hershey to continue without a partner with which it can combine resources, said Eric Katzman, an analyst at Deutsche Bank Securities Inc.

``The deal between Mars and Wrigley will put pressure on the Hershey Trust, who has steadfastly opposed a change in strategic independence, to reconsider its previous discussions with Cadbury,'' Katzman wrote in a note to investors.

Wrigley jumped $14.46, or 23 percent, to $76.91 at 4:15 p.m. in New York Stock Exchange composite trading. McLean, Virginia-based Mars is the eighth-largest private company in the U.S., Forbes magazine said in November.

Cadbury, the maker of Dairy Milk chocolate, bought Pfizer Inc.'s Adams candy unit for $4.2 billion in 2003 to become the world's second-largest maker of chewing gum. After the May 7 split, it will trade as Cadbury Plc in London, with Dr Pepper Snapple trading in the U.S.

``You have to get more efficient on the selling and distribution side, and that's why I think the other players will need to consolidate,'' Mariann Montagne, a Thrivent Asset Management analyst in Minneapolis, said yesterday in a Bloomberg Television interview.

Potential acquirers are Nestle and Kraft Foods, the world's two largest foodmakers, she said. Thrivent manages more than $73 billion with 34,406 Wrigley shares on Dec. 31.

To contact the reporter on this story: Josh Fineman in New York at jfineman@bloomberg.net.