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There's A Smile In Every Hershey Takeover Offer: Gadfly

Snacks giant Mondelez made a bid for Hershey, the $24 billion maker of the iconic American chocolate bar. Many will tell you that any offer is dead on arrival because Hershey is controlled by a family trust that's long been opposed to selling the company. But here's why it shouldn't spurn a suitor out of hand:

For nearly three years, Hershey's stock price has been flat. Candy and chocolate aren't exactly fast-growing areas of the food market, there's not a whole lot of room to innovate and millennials are driving a consumer shift toward healthier snacks. Short sellers are even beginning to take a bite out of the company:

Hershey's valuation may be looking increasingly too rich to justify -- unless of course a deal does take place. That's not to say the company should run with the first offer Mondelez makes. After all, Mondelez is backed by big activist shareholders Bill Ackman and Nelson Peltz, and one would think they'd keep M&A negotiations from resulting in too frothy a price.

But the food industry is consolidating at a rapid pace, and acquirers are proving willing to pay higher valuations than in the past given the growth challenges they're up against. That means now's the time to hear out suitors and push for the best takeover price possible -- not summarily dismiss the idea of a deal. It could be good for Hershey shareholders.

Hershey should hold a formal auction process and see who else comes out of the woodwork...perhaps Nestle, Kellogg -- or even Warren Buffett (it's no secret that the billionaire's sweet tooth has motivated some of his past acquisitions), either with or without an assist from 3G Capital.

Nestle could pay well north of the $107 a share that Mondelez reportedly offered. In fact, if it stumped up an all-cash offer of $124 a share for Hershey, representing a decent 30 percent premium to Wednesday's closing price, the purchase would still immediately boost earnings even without accounting for synergies, according to data compiled by Bloomberg. A deal at those terms would actually be even more accretive to Kellogg, boosting its earnings by almost 20 percent, according to Bloomberg data.

Notably, Mondelez's offer -- half in cash and half in stock, according to CNBC -- represents a mere 10 percent premium, which is well below this year's global average of 32 percent. While maintaining the same ratio of cash and stock, it can afford to pay roughly $116 a share while having the deal remain accretive before any synergies, Bloomberg data show.

Hershey leaped to almost $118 a share, but investors curbed their enthusiasm after additional details about Mondelez's offer emerged. The fact that it's still hovering at roughly $112 a share indicates the Oreo cookie maker will likely need to sweeten its terms.

Poor Bill Ackman, though. He just can't catch a break. In March, Pershing Square trimmed its stake in Mondelez after the holding became outsized compared to the plummeting values of his investments in companies like Valeant. Any deal with Hershey seriously lessens the likelihood that Mondelez will become a takeover target itself -- the very idea behind Ackman's thinking when he bet on the company last summer. This probably isn't the deal dessert he ordered.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

News by Bloomberg, edited by ESM. To subscribe to ESM: The European Supermarket Magazine, click here.

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