The world's largest chocolate makers are gearing up for a potential corporate battle to buy Britain's Cadbury, with Hershey and Ferrero saying Wednesday they were considering an offer to rival Kraft's hostile takeover bid.
Speculation had been mounting that as Cadbury resisted Kraft's approach, other industry heavyweights would smell an opportunity and enter the fray.
Hershey, the largest U.S. chocolate producer based in Pennsylvania, and Ferrero, the Italian maker of Nutella chocolate spread and Tic Tacs, are expected to join forces to compete with Kraft's greater financial might.
"Hershey confirms that it is reviewing its options and at this stage there can be no assurance that any proposal or offer from Hershey will be forthcoming," the company said in an announcement Wednesday.
Ferrero International SA posted a similar statement.
Cadbury PLC has dismissed Kraft's bid, announced Nov. 9 and worth $16.4 billion or around 726 pence per share, as "derisory." Industry experts saw Kraft's hostile offer, which did not increase an earlier friendly bid rejected by Cadbury management, as a bet that no competing offers would emerge.
The Wall Street Journal reported Tuesday that The Hershey Co. and Ferrero executives have been in talks for several weeks and that Hershey is aggressive about pursuing a deal.
Ferrero is a privately held company with $9 billion in sales last year. Hershey earned $5.13 billion in its most recent full year.
Teaming up with Ferrero could give Hershey the financial firepower to get into the bidding, which some had doubted it would be big enough to do. Hershey had $119 million in cash on its balance sheet as of Oct. 4 and $1.5 billion in long-term debt. Many analysts have doubted it could finance a higher bid than Kraft's on its own.
A cooperative bid also raises issues of its own, however.
Significant questions
"Significant questions remain regarding how any deal might be put together, not least in terms of product and/or geographical segmentation," said Jeremy Batstone-Carr, analyst at Charles Stanley & Co.
"Whilst aware that seldom does smoke exist without fire, the likely complexities associated with a rival approach for Cadbury in purely practical terms leave us strongly of the view that Kraft remains the strongest rival but that it will need to increase its offer in order to win control.
Analysts at Evolution Securities say a deal with Kraft would likely be struck at a price of at least 850 pence, well above the current bid.
Under British takeover rules, Kraft must post its formal offer document to Cadbury shares.
Once that is done, it has 46 days in which it may raise its offer price, and 14 days after that in which to secure acceptances from a majority of shareholders.
If a rival bid emerges, the 60-day timeframe for its bid starts over.
Hershey has a long-standing license to sell some Cadbury products, including Cadbury and Caramello chocolate brands in the U.S. and York peppermint patties and Almond Joy worldwide. Those deals could be threatened by a Kraft acquisition.
Hershey has sought to expand its international portfolio over the past three years through joint ventures in Brazil, China and India. About 85 to 90 percent of Hershey's sales are in the relatively slow-growth market of North America.
However, Hershey is considered by analysts to be unlikely to bid without a larger, well-financed partner because of its smaller size and a complicated ownership structure.
Hershey's late founder, Milton S. Hershey, established a charitable trust that remains the company's majority owner. Trust chairman LeRoy S. Zimmerman has said the company is committed to aggressively growing, but has also insisted the trust will not give up its controlling stake.