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Hershey Media Report 7/7/16
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Will Mondelez Raise Its Bid For Hershey?
Jul 6, 2016 | Forbes
By Gene Marcial
What’s next for Mondelez International after its spurned offer to buy Hershey HSY -1.14%? Although the Hershey (HSY) board of directors unanimously rejected overtures from Mondelez (MDLZ) to acquire the global chocolate and confectionary producer, there’s a chance, however remotely, that a higher bid price will eventually come from Mondelez or another unsolicited bidder. -
Is a Hershey/Mondelez Deal Even Possible?
Jul 6, 2016 | Food Institute
By Jennette Zitelli
You'd have to be living under a rock to have missed the recent news about Mondelez's takeover bid for Hershey. While not much has actually happened yet, it sparked a lot of speculation about if such a deal would even come to pass and what this merger could mean for the industry. Here are some of the highlights so far. -
Should you celebrate when your dividend paying company is about to be acquired?
Jul 7, 2016 | ValueWalk
I do not like it, when my dividend paying companies are acquisition targets. Last week, shares of Hershey (HSY) increased to an all-time high of $117, because of news that Mondelez (MDLZ) will try to acquire the company. Many investors were happy from the one-time pop in the stock price. I myself was not overly enthusiastic. In this article, I will outline my reasoning behind this. I will also use factual examples in order to illustrate my point.
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Will Mondelez Raise Its Bid For Hershey?
Jul 6, 2016 | Forbes
By Gene Marcial
What’s next for Mondelez International after its spurned offer to buyHershey HSY -1.14%?Although the Hershey (HSY) board of directors unanimously rejected overtures from Mondelez (MDLZ) to acquire the global chocolate and confectionary producer, there’s a chance, however remotely, that a higher bid price will eventually come from Mondelez or another unsolicited bidder.
That’s the betting shaping up on Wall Street. Mondelez, a global snack food company formerly called Kraft Foods KRFT +%, which had proposed a surprise offer to purchase Hershey for $107 a share in cash and stock.
For years, the 120-year old Hershey has been tagged on Wall Street as an attractive buyout target mainly because of its more than 80 products on the market worldwide, including globally popular brands such as Kisses, Reeses’s and, yes, Hershey chocolate, which produced total annual sales of $7.4 billion in 2015. But the main hindrance to any proposed transaction has always been the Hershey Trust which, as trustee for the Milton Hershey School and the company’s major shareholder, controls 80% of the class B voting stock. The Trust has consistently turned away any party interested in acquiring Hershey Co.But now several activist investors believe the time has come when the Trust may alter its adamant stance — if a much higher price and much better conditions spiced with more attractive terms for the Trust are offered by Mondelez. These investors are optimistic, although judging from the wording of the summary rejection by Hershey’s board, the likelihood of a change of heart may still not be in the cards. The board in a statement said that it has determined “no basis for further discussion between Mondelez and the Company.”
But one thing that’s significant is that shares of both Hershey and Mondelez haven’t lost much of the gains they chalked up since the news surfaced about the unsolicited Mondelez offer to buy Hershey. Mondelez’ stock had jumped to $45 a share from $41, and currently it still trading at around $45. And Hershey, whose stock climbed to $113 a share when the buyout offer news broke out, from $96, is currently trading at $109. That demonstrates that the market has reappraised higher the valuation on both stocks.
So whether or not a deal is plausible, some savvy investors believe the best strategy now is to buy shares of both Hershey and Mondelez, not only because of the possibility that Mondelez may, indeed, come up with a much more qualitative offer that may finally please the Hershey Trust, but also because on their own, the two companies have sound fundamentals with pathways to further growth.
The S&P Global Market Intelligence has added Mondelez to its “Top 10 Portfolio” and rated it as a “strong buy” on June 30, 2016, right after Mondelez had made its offer to buy Hershey. “Although we believe a tie-up makes sense, any deal would require a significant premium versus packaged food peers in order to satisfy the Hershey Trust Fund,” says Catherine Seifert, equity analyst at S&P Global Market Intelligence. She expects modestly higher organic sales in 2016 at Mondelez, coupled with cost-cutting initiatives by the company to offset the negative impact from a stronger U.S. dollar.And on Hershey, S&P Global has upgraded the stock to a buy from a hold, and raised its 12-month price target by $32 — yes, by $32 a share — to $126, a 15% premium to its packaged food peers.
Joseph Agnese, equity analyst at S&P who follows Hershey, also believes that Mondelez or any other suitor will have to offer a significantly higher premium in order to satisfy the Hershey Trust. “A combination of the two companies makes strategic sense due to the two firms’ complementary geographic snacks businesses,” says Agnese.
“We look for 2016 Hershey sales to rise 2.9%, to $7.57 billion, up from $7.38 billion in 2015, on benefits from the realization of price increases in North America and new product reductions,” says Agnese. He expects sales volume to be supported by increased marketing spending in core brands, and “from strong double digit growth in international markets,” adds Agnese.
Without including any deal, Agnese expects Hershey to post operating earnings of $4.20 a share in 2016, up 3.1% from S&P’s estimated operating earnings of $4.15 in 2015, that excludes one-time items from both periods. The analyst also expects EBITDA margins to widen in 2016, to 23.4%, from 23.2% in 2015, on improved gross margin performance, restructuring savings, and more efficient marketing spending.
Hershey has been beefing up its presence in China, as well, where demand for its products has slowed somewhat as the country experienced a significant slowdown last year. That drop offset part of the improved demand for its products in the U.S. So to help bolster its sales volume in China, Hershey has acquired the remaining 20% of Chinese confectionary, Shanghai Golden Monkey, that it did not already own.
On Mondelez, rising incomes and changing lifestyles in developing markets are expected to help fuel further sales and earnings growth for the company that, in July 2015, formed a coffee joint venture with D.E. Master Blenders in return for about $4 billion and a 44% interest in the new company. On its own (without a Hershey acquisition), Mondelez expects to grow revenues at or above the growth levels on the categories on which it operates over the long term, notes Agnese. But the reported sales growth levels may be restrained by the strength of the dollar relative to other currencies over the next 12 months.
Moreover, Mondelez is targeting $3 billion in gross productivity savings between 2014 and 2017, which Agnese expects will help drive margin expansion. “We expect supply chain and headcount cost cuts, along with a more efficient use of media spending, to contribute to overall operating margin expansion over the next few years,” says Agnese.
Mondelez is targeting operating margins of 15% to 16% in 2016, up from 14% (excluding Venezuela) in 2015, notes Agnese. After a reduction in the number of shares outstanding, he projects 201 earnings of $1.89 a share, up 15% from pro-forma 2015 earnings of $1.65 a share.
Agnese expects activist investors to apply pressure on Mondelez’s management to achieve growth goals and by what he views as “favorable long-term growth prospects.”
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Is a Hershey/Mondelez Deal Even Possible?
Jul 6, 2016 | Food Institute
By Jennette Zitelli
You'd have to be living under a rock to have missed the recent news about Mondelez's takeover bid for Hershey. While not much has actually happened yet, it sparked a lot of speculation about if such a deal would even come to pass and what this merger could mean for the industry. Here are some of the highlights so far.
Mondelez International is proposing to acquire The Hershey Co., in a deal that would bring major snack and confection brands, including Oreo, Cadbury, and Reese’s, under one roof. Mondelez offered $107 per share for Hershey, which reportedly amounts to a bid worth $23 billion. The new company would retain the Hershey name if it were to go through.
Fortune reports the combined company would have close to $37 billion in annual sales and a market capitalization over $90 billion. It would bring together Mondelez’s Nabisco, Oreo, Cadbury, and Trident brands with Hershey’s namesake chocolates, Reese’s, and Kisses brands. It would also create the world's largest confectionary company, commanding 18% of the market.
However, while Hershey did confirm the offer, it noted the board unanimously rejected the bid. Hershey also determined that it provided no basis for further discussion between Mondelez and the company.
Many analysts are attributing the veto to Hershey's largest shareholder, Hershey Trust Co., according to The Wall Street Journal. The trust is known for dismissing deals in the past, with 81% of the company's voting power, but a change in the board's membership, a need for diversification, and an investigation by the state’s attorney general could bring about a change in the status quo.
The trust controls a $12 million endowment for the Milton Hershey School, which educates underprivileged children in Hershey, PA. Citizens of the town and alumni of the school have been vocal about opposing a sale of Hershey, worrying that it would hurt the town. Even though the trust is in favor of diluting its stake in Hershey, it has sided with public opposition in past merger talks and refused bids from companies like Wrigley, Nestle and Cadbury.
The board now has some new members, though, and the Pennsylvania attorney general’s office is seeking the resignation of several longstanding board members, meaning the new board may be more open to a sale.
Analysts at Bloomberg also note that a deal between the two companies wouldn't run into any antitrust barriers. As previously mentioned, the combined company would only make up 18% of the market, and a majority of Mondelez's sales are outside of North America. They also mention that the deal would only be the eighth-largest this year.
Jack Skelly of Euromonitor International says that no matter what, Mondelez seems content to keep pushing the deal, noting, "They wouldn’t have started the process of this if they didn’t think they had a good chance."
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Should you celebrate when your dividend paying company is about to be acquired?
Jul 7, 2016 | ValueWalk
I do not like it, when my dividend paying companies are acquisition targets.
Last week, shares of Hershey (HSY) increased to an all-time high of $117, because of news that Mondelez (MDLZ) will try to acquire the company. Many investors were happy from the one-time pop in the stock price. I myself was not overly enthusiastic. In this article, I will outline my reasoning behind this. I will also use factual examples in order to illustrate my point.
As a dividend growth investor, my goal is to buy shares in a company that exhibits certain attributes such asa wide moat, a track record of annual dividend increases and an attractive valuation. I spend a lot of my time upfront, in order to find, research and buy those ideas at the right valuation. My intention is to hold on to such a company for decades. Therefore, for this one time effort, I end up generating dividends for decades to come.
Unfortunately, things in life and business do not proceed in a linear fashion. Some of the companies I purchase for my diversified portfolio end up cutting dividends. I sell as a result of this.
The other problem I have experienced occurs when quality companies with a lot of potential get acquired. On the surface, everyone looks happy, because the shareholders can sell their stock at a premium to the going rate. Unfortunately, an acquisition could force shareholders to lock in losses if they paid too high of a price, or force them to pay taxes on capital gains.
I do not like those odds. This is because I get a one-time boost to my net worth when my shares are acquired, but then I have to find a way to allocate that money intelligently. Whenever a company I own is acquired, I feel like I am robbed from future dividends and capital appreciation. I feel this way, because when someone acquires a quality dividend growth company in its entirety, they do it because they know it earns stable and growing earnings and they expect this to continue. So while I receive a one-time boost to my net worth, I forego all the benefits of this wonderful business from now until the end of time.I have had several companies I owned, which were ultimately acquired. In most of these situations, I received either a combination of cash and stock in the acquirer or just cash.
When I receive cash, I have to realize my capital gains and pay taxes on this event. Paying too much in taxes too frequently inhibits the compounding process. This is costly, and would make the shareholder poorer over their lifetime investment career.
If I receive stock, I usually hold on to it. Of course, now I have to decide if the acquiring company is a quality one worth holding on to. Under most scenarios I hold on to the stock of the acquirer.
The other problem with acquisitions involves situations where long-term shareholders are forced to take a loss on their investment. One example includes the situation where you purchased shares in a company at inflated valuations, because you believed that the firms long-term prospects justify the high valuations. The risk you are taking is that the company performs as expected, but the valuation multiple contracts. As a result, you do not generate much in terms of profits. To add insult to injury, someone steps in and acquires the stock you own at a higher price. The problem could be that the higher price is lower than the price from the time of your purchase. Another problem could be that the shares are worth roughly what you paid for them one or two decades ago. This is one of the reasons I learned from studying history. This is one of the many reasons why I won’t pay more than 20 times earnings for a company’s stock.
I think that now is time to discuss several examples.
For example, this is not the first time that Hershey is subject to takeover. Back in 2002, the company was in talks to be acquired by Wm Wrigley for $12.5 billion in cash and stock. The offer price was $42.50/share ( this price was adjusted for the 2:1 stock split from 2004). The company was on track to earn $1.46/share in 2002, and it paid 64 cents/share. The share price jumped from $28.68/share to $39.36/share as a result. The all-time-high was at $38.19/share, achieved in April 1998. The company earned $1.17/share in 1998 and paid a total dividend of 46 cents/share. As you can see, people who bought Hershey stock in 1998 overpaid massively for it at over 30 times earnings and an yield of a little over 1%. They could only barely eke out a return only if the full value of the company was realized when it was acquired by a competitor in full. However, the board of trustees of Hershey Trust rejected the offer, after a lot of public pressure. Hershey Trust owns approximately one-third of the company, but has over three-quarters of the voting power, due to the fact that their stock has preferential voting power.
Right now, the trust owns 12.7 million A shares and 60.60 million B shares. The total number of shares is roughly 216 million. Holders of the Class B stock have 10 votes per share.
The trust uses dividends to fund charitable activities. As a perpetual institution, they are not interested in maximizing short-term gains, at the expense of foregoing long-term gains. However, they did seem interested in diversifying their endowment in 2002, per the NY Times article linked above.
In hindsight, selling would have been a major mistake for Hershey Trust. The stock has almost tripled from the highs in 2002. In addition, the trust collected $18.67/share in dividends since the end of 2002. An investor who purchased the stock at the highs for 2002, would have recovered more than half of their initial purchase price with dividends alone. In addition to that, their stockholdings are worth almost three times as much too. In fact, a $1000 investment in Hershey stock at the end of July 2002 would have turned into $3,960 by the beginning of July 2016 ( with dividend reinvestment).
It makes sense that the current offer of $107/share by Mondelez will be rejected. Now that I think about it, even $120/share may be undervaluing the business, relative to its long-term prospects. As an individual investor, I would not pay more than 20 times earnings for a company. If I were buying the whole business however, I would gladly pay 30 times earnings for it. I would then finance the whole thing with cheap debt at fixed long-term rates, and grow my net worth as the company grows and pays off the loan over time.
Either way, it is important to avoid buying an overvalued company stock. Back at the beginning of 2015, there were quite a lot of investors I follow, who started acquiring the stock around $108 – $111/share. They did that after missing out on the gains for years. When you start feeling that you are missing out on a stock after it has gained a lot, you need to stop and think for a second why do you want to chase the stock, regardless of valuation. As I reviewed the situation in early 2015, I determined that buying Hershey would provide investors with low returns for the first decade. However, buying the stock below $90/share would provide a better opportunity for investors. If the company continues growing, the highest returns would be realized for those holding for at least two decades.
Unfortunately, if the stock is acquired today, and you get cash and stock for your rightful claim to Hersheys future earnings and dividends, you won’t earn the returns you assumed. This analysis puts in perspective the fact that the acquisition of a quality company like Hershey is robbing you, the shareholder of Hershey, from long-term dividend growth and share price appreciation. If Hershey sold itself at the original offer price of $107/share, those who bought the stock in early 2015 would have not fared that well. The price of $107 was essentially the price that the company could have fetched in a sale of the whole business to a private owner. As an individual shareholder, this is too high of a price to pay. I would not pay more than $85/share for Hershey stock at this moment. This is equivalent to 20 times expected earnings of $4.25/share for 2016.
Let’s illustrate the potential destruction of shareholder wealth with another example. But this time, I will use a longer term time frame.
Back in March 1980, McCormick (MKC) rejected the takeover from Swiss Pharmaceuticals Company Sandoz Ltd. At the time, McCormick had sales of $457 million per year, and net income of $19 million. The business was valued at roughly $320 million. Ownership was divided between 11.371 million shares.
Luckily for shareholders, McCormick was able to reject the acquisition offer. This dividend champion has managed to reward patient long-term shareholders with a dividend increase for the past 30 years in a row. The company has managed to boost annual dividends almost 50 fold since 1980.
Back when the offer was rejected however, the stock fell by 50% as a result of that however between August 1980 and December 1980. Seeing your stock holdings decline from $2.05 to $1 in less than 5 months is scary. But this was a short-term fluctuation in the grand scheme of things. As Charlie Munger says, “If you are not able to sit through a 50% correction in your stockholdings, you deserve the mediocre performance that you get”.
An investor who bought at the highs from 1980, and held on, while spending their dividends every quarter, is generating an yield on cost of over 85%. This means that almost every single year, the shareholder gets their cost basis returned to them in the form of dividends. This example illustrates the power of long-term dividend investing in quality companies such as McCormick (MKC). Many long-term investors will likely get a similar high yield on cost if they patiently stick to their portfolio investments, and let them compound on their own for the next 20 – 30 years.
Long-term investors, who stuck with the company, reaped the benefits of ownership, as the stock has gone up more than 100 times during the next 36 years. And I am not even including the power of reinvested dividends.
In 2015, the company generated almost $4.3 billion in annual revenues, and a net income of $almost $402 million. The company’s ownership was dividend between 129, 200,000 shares.
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