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A Hershey Bar to the Winner

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America’s largest confectionery company is up for sale and speculation is rife over which of its competitors might acquire it for an estimated US$10 billion. Nestlé, Kraft and Cadbury Schweppes have all been touted as potential suitors, with Mars almost definitely ruled out by anti-trust legislation. The move is likely to affect Pfizer’s sale of Adams, which might sell for less than the expected US$4 billion if there is less competition to purchase it, and might encourage Mars to acquire smaller confectionery interests to bolster its share of the US market.

Hershey, which boasts nearly a quarter of the US$25 billion US confectionery market, announced on 25 July that it is exploring the possibility of a sale following a decision by the Milton Hershey School Trust to diversify its assets. The trust owns over 30% of Hershey's shares and roughly 76% of the voting stock.

Hershey announced strong Q2 results just 2 days prior to the announcement, detailing recent growth above that of the chocolate confectionery sector in the US. As yet no company has made an offer for Hershey and all options are still open to the Trust, which might sell off selected brands or a minority interest rather than the entire company. Nonetheless the news of the proposed sale has created a stir in an industry which has been characterised by consolidation in the past few years.

Purchase of KitKat will not be on impulse

Nestlé, the world’s second largest confectionery player, is the most likely suitor for Hershey. Although Nestlé’s current business strategy concentrates mainly on non-confectionery sectors, including pet foods and bottled water, it will be viscerally tempted by the opportunity to gain control of KitKat in the US.

Owner of the countline everywhere else in the world, the company has made KitKat its flagship chocolate brand, and the prospect of acquiring it in its most successful market will be a major temptation. Furthermore the acquisition would boost Nestlé’s relatively small US confectionery business, increasing its share of US confectionery sales from just under 5% to nearly 30%, leapfrogging Mars, Kraft and Wrigley to the number one spot.

Kraft may be tempted

Kraft, ranked third in the overall US confectionery market in 2001, is also likely to show an interest in Hershey as a means to improve its chocolate business. Strong sales in both Eastern and Western Europe, as well as Latin America, where it boasted 11%, 11% and 18% of chocolate retail sales in 2001 respectively, compared to just 1.5% share in North America.

However, Kraft is still in the process of integrating Nabisco and may be unwilling or unable to incur further costs on the scale entailed by an acquisition of Hershey.

The company has also previously shown a tendency to divest non-core confectionery brands with the Hollywood gum business sold to Cadbury Schweppes in France in 2000, and the former Nabisco brand, Lifesavers, sold to Hershey in the same year. Its current strategy is beverage-focused and in mid-July the company acquired Mexican juice and soft drink manufacturer Jugos del Valle, subject to regulatory approval. The opportunity offered by the Hershey sale may prompt a rethink of Kraft strategy, but this appears unlikely.

Chocolate too much of an indulgence for Cadbury?

An outside contender is Cadbury Schweppes, which has just purchased Dandy as part of a global strategy to chase developing markets and dynamic product sectors such as gum. Cadbury Schweppes has been linked with Adams since the end of 2001 and this purchase would be far more in line with Cadbury’s gum-focused and expansionist strategy, as well as being a more affordable purchase, coming as it does after a spate of acquisitions in gum and beverages.

Cadbury’s US confectionery share of 1.5% in 2001 is substantially lower than its overall global share of almost 6%. Purchase of Adams would give Cadbury a number 5 ranking in the US and would place Cadbury in a more dynamic sector than chocolate confectionery, which is currently dominated by Hershey and Mars. The value of the US gum sector is set to grow in real terms by 26% in the five years to 2007, in comparison to just 3% for chocolate.

Whatever the outcome of the bidding, if the sale of Hershey does go ahead it will be subject to lengthy checks by regulators and is unlikely to complete until 2003. The company would prove a solid acquisition, although bad press over worker strikes at the company, and the breaking of the link with the Trust, might affect brand loyalty in the short term.

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