By ILAN BRAT, JEFFREY MCCRACKEN and DANA CIMILLUCA
The charitable trust that controls Hershey Co. is pushing the chocolate maker to launch a rival $17 billion bid for Cadbury PLC that would be bigger and have more cash than what Kraft Foods Inc. has offered, said several people familiar with the matter.

The trust, which in the past has complicated Hershey’s merger efforts, is now seen by insiders and others on the deal as the aggressor for a purchase and prodding Hershey Chief Executive David West to pursue a competing offer to the $16.5 billion bid Kraft made earlier this month for Cadbury, the U.K. confectionery giant.

A bid, if one emerges, wouldn’t be ready for at least two weeks and the terms of a possible offer are in flux. One possible scenario, said these people, would include at least $10 billion in cash from Hershey, plus $2 billion in new Hershey shares.

A third component would be another $3 billion to $5 billion in cash from rich investors in exchange for equity in Hershey, these people said. The investors are being courted by Hershey adviser Byron Trott, a former Goldman Sachs banker known for his close relationships with Warren Buffett and other rich investors.

The trust would also sell about $1 billion in assets, but hopes to structure the deal to maintain control of Hershey, these people said. Hershey and the trust are working with two banks to raise the money: J.P. Morgan Chase and Bank of America Merrill Lynch.

Spokesmen for Hershey and the Hershey Trust declined to comment. The trust initially didn’t think it would be able to put together a bid, but has found in recent weeks that banks are now willing to lend at five times earnings before interest, taxes, depreciation and amortization or higher for a combined Hershey-Cadbury, which could allow a successful bid to be constructed.

Kraft Pursues Cadbury

View Interactive

The talks between Hershey and Ferrero , however preliminary, are the first concrete evidence that rival bidders for Cadbury may emerge. See how the brands have evolved.
The trust board has been pushing the Hershey board to come up with an operating plan that would show how a combined Hershey-Cadbury would work. But some on the Hershey board are worried that a deal could burden the company with too much debt. There’s some overlap in opinion, said one person involved in the matter, because some trust board members—including former Pennsylvania Attorney General LeRoy S. Zimmerman and longtime investment banker Robert F. Cavanaugh—also serve on the corporate board.

“The two [boards] are trying to stay aligned, but aren’t completely aligned,” said this person.

Some observers question whether trust board members will have the will to sign off on a deal. “They may say they want to do it, but these things get political,” one banker who has dealt with Hershey said. “Bankers and executives may get their support, but then it gets in the paper and people start to complain locally about borrowing too much or losing control or the impact on the town of Hershey, and the plans collapse.”

Another question mark is whether Hershey shares will hold up if the company proceeds with a bid. Share declines could eat into the value of any offer. In a sign of concern among the company’s shareholders over the dilution that any offer could bring, Hershey stock fell roughly 4% this week after the company’s interest in exploring a Cadbury bid surfaced. Hershey shares were little changed Friday on the New York Stock Exchange at $37.09.

Hershey’s Mr. West has been talking with Ferrero SpA, the Italian candy maker, about making a possible joint bid for Cadbury. But negotiations have not advanced, one person familiar with the situation said. The potential tax consequences of divvying up Cadbury between Hershey and Ferrero have arisen as a complicating factor. Ferrero could seek another partner if it decides to proceed, another person said.

The Hershey Trust Co. helps fund a boarding school for low-income children in Hershey, Pa. In the past, the trust has been reluctant to pursue large acquisitions and scuttled a 2002 deal with Wm. Wrigley Jr. Co. at the last minute. Later, its insistence on retaining control complicated talks a merger with Cadbury, leading many on Wall Street to see the trust as an obstacle to any strategic transactions.

Now, people familiar with the matter said, trust board members have decided that Hershey must expand operations outside the U.S. to keep growing and preserve the trust’s mission. “It has decided it must be a consolidator before it is consolidated, which would risk its mission,” said one person familiar with the trust’s thinking.

Hershey could also benefit from close links it has with Cadbury. Hershey distributes Cadbury’s products in the U.S. and the two companies have explored a combination before. Hershey, with its charitable credentials, could be a more palatable option to those in the U.K. who are concerned about a foreign takeover of one of the country’s most prized and storied brands. Indeed, Cadbury executives led by Chairman Roger Carr have made no secret of their discomfort with a deal with Kraft, at least on the present terms.

Kraft’s offer, which the company made official Nov. 9, is comprised of cash and stock, with cash portion making up just 40% of the offer. Many Cadbury shareholders have said the offer is too low and has too little cash. A Hershey bid could be topped by Kraft, which has lined up roughly $9 billion from lenders including Citgroup Inc., Deutsche Bank AG and HSBC Holdings PLC.

For Hershey, combining with Cadbury could help substantially build sales outside North America and give the company access to faster-growing gum and candy maSrkets. About 85% of Hershey’s $5.1 billion in annual sales are in the slow-growing U.S. confectionery market.

Tapping into Cadbury’s well-established networks in emerging markets such as India and Latin America could help Hershey drive growth by selling to the faster-growing populations in those countries.

Hershey has about $5 billion in annual revenue and about $1 billion in earnings before interest, taxes, depreciation and amortization in the twelve months to early October, according to government filings. Cadbury has about $9 billion in annual revenue and about $1.2 billion in Ebitda in the most recent 12 months.

If you enjoyed this post then Subscribe to Savvy Investor via RSS