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Hershey Media Report 7/8/16
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The Pa. Attorney General has tried to fix Hershey Trust for years. Will this probe be different?
Jul 8, 2016 | Philadelphia Inquirer
By Bob Fernandez
Mark Pacella, the state's watchdog over nonprofits, has spent about half his 29-year career at the Attorney General's Office seeking reforms at the Hershey Trust for impoverished children. -
Hershey history: Deal-breaker or sweet nothing?
Jul 8, 2016 | Central Penn Business Journal
Hershey bills itself as the sweetest place on earth, but sometimes it seems like the strangest. -
$23 Billion Was Not A Sweet Enough Offer For Hershey
Jul 8, 2016 | Seeking Alpha
By Cara Conwell
As many of you were made aware last week, there was almost an acquisition between two of the biggest parties in the confectionery industry. According to the Wall Street Journal, Mondelez International Incorporated (NASDAQ: MDLZ) contacted The Hershey Company (NYSE: HSY) offering them a buy-out at $107 per share. This approximately equals a $23 billion dollar offer to fully takeover Hershey. Throughout history, Hershey's seems to take a lot of pride in their brand. Hershey's declined the offer and said there is no further room for consideration at that price.
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The Pa. Attorney General has tried to fix Hershey Trust for years. Will this probe be different?
Jul 8, 2016 | Philadelphia Inquirer
By Bob Fernandez
Mark Pacella, the state's watchdog over nonprofits, has spent about half his 29-year career at the Attorney General's Office seeking reforms at the Hershey Trust for impoverished children.
In 2003, Pacella and his bosses struck a deal with the trust, requiring them to limit board members' self dealing. It didn't work.
In 2013, he was at it again, striking an agreement to curb board pay, which also failed.
Today he finds himself in a familiar position: investigating the giant charity.
Critics wonder: The trust is so rich and so connected; will this effort be any different?
Leaks from the Hershey Trust this year have revealed just how bad things are.
Members of Hershey's boards have spent millions of dollars investigating themselves over possible conflicts of interest as they have also indulged in limo rides and costly travel and reaped millions in board compensation.
Pacella's approach - and one backed by five elected or appointed attorneys general over him since 2000 - has been to correct wrongdoing on the Hershey boards through negotiated settlements as opposed to court actions seeking more drastic consequences.
But those deals in 2013 and 2003, critics say, lacked hard-and-fast penalties on the politically powerful charity, leading to more scandals.
"Fifteen years later, where are we at? We're right back where we started. That's my big disappointment," said Joseph Berning, a Milton Hershey School alumnus who began seeking governance changes at the charity in the mid-1990s.
"[Pacella] was always the one saying that half-measures weren't good enough, and then the Attorney General's Office turned around and settled for half-measures," Berning said of the 2003 settlement that was to permanently fix the charity.
"They never did it right in the first place," Berning said. "They settled and compromised and weakened it. They allowed the trust to come in and bully their way out of the situation."
Based on internal memos, Pacella is again seeking a voluntary settlement for the latest wrongdoing at the trust, which finances and runs the troubled Hershey School for at-risk children, one of the nation's richest charities. The school, with $12.3 billion in assets, enrolls 2,000 mostly Pennsylvania students.
Pacella also has requested the removal of three board members, including the chairwoman, Velma Redmond, and demanded that board members repay the charity hundreds of thousands of dollars in legal fees for bogus internal investigations.
Pacella has said he could pursue litigation against the trust by July 31 if some of his terms are not met.
Trust spokesman Kent Jarrell on Tuesday repeated a month-old statement that the Hershey boards have "a long history of voluntarily and constructively working" with the agency and "expect to appropriately resolve outstanding concerns."
Pacella, a chief deputy attorney general, did not respond to interview requests. Agency spokesman Jeffrey A. Johnson said, "We can't comment at this time due to the fact that this is an ongoing investigation."
Solicitor General Bruce Castor, the office's No. 2 executive with final say in legal matters, met with trust officials in mid-June, saying that he backed Pacella and considers litigation an option, say two sources with knowledge of Castor's position.
Litigation would expose the charity's finances and board behavior to the public through court filings and could lead to court-ordered changes. A case would be litigated through the Dauphin County Orphan's Court.
But sources say the trust has been stonewalling Pacella and could be waiting for the November election to reach a more favorable deal with a new attorney general.
Incumbent Kathleen G. Kane, who faces a criminal trial over allegedly leaking confidential information to a reporter, is not running again.
State Sen. John Rafferty, the Republican candidate, said Wednesday that "people in the state government are getting tired of the Hershey Trust story and they want it to end."
He said he would have "the guts to initiate changes" and override political interests.
"We have to get rid of the perks," he said. "It's not about expensive bottles of wine. It's about the kids."
Josh Shapiro, the Democratic candidate, said Monday that the Hershey Trust "needs real reform" and that its leaders must be held accountable.
Pacella's probe "raises the question as to whether we need a broader settlement than what is on the table now and whether it has real teeth for enforcement," Shapiro said.
Fans and critics alike call Pacella an exemplary public servant. He heads the attorney general's Charitable Trusts and Organizations Section and has served as the past president of the National Association of State Charity Officials.
His defenders say that he has a firm grasp on what needs to be done in Hershey but that agency politics have prevented him from doing it.
"My experience with Mark and other people in that office is that they try to make sure charity operators fulfill their purpose without being vindictive against the boards and directors who may have not done what they should," said Don Kramer, a lawyer with Montgomery McCracken Walker & Rhoads L.L.P.
As for Hershey, Kramer said: "It's politics."
Politically connected board members such as LeRoy Zimmerman, a former two-term attorney general, and Philadelphia-area money manager James Nevels have each earned more than $1 million in Hershey-related board pay over the last decade. (Zimmerman is no longer on any Hershey-related boards.)
The trust also owns a controlling stake in the Hershey Co. candy giant and Hersheypark, for-profit firms that employ thousands in central Pennsylvania. The same people on two separate boards manage the charity's assets and oversee the school.
Joseph E. Lundy, a lawyer with the Schnader Harrison Segal & Lewis L.L.P. firm in Center City, said: "I'm a fan of Mark Pacella. He is what I call a good guy. He seems to have an even temperament and a good head on his shoulders and good instincts. And I would suggest he has been an extraordinary public servant."
Lundy called the Hershey Trust "a hornet's nest" of politics and the Attorney General's Office "not as powerful as you think."
But the agency and Pacella are also the regulators of last resort for charities, with broad oversight powers for change.
Insiders who have come forward have not fared well. Robert Reese, a former trust board member and the president of the Hershey Trust Co., which manages its finances, filed a petition in the Dauphin County Orphan's Court in early 2011 describing fiscal concerns that included soaring board pay and use of school funds to buy a luxury golf course at an inflated price of $12 million.
The trust ousted Reese from its boards around the time of the petition. Reese withdrew the petition after a few months for health reasons. Pacella investigated the claims and did not take action on some of them, court records show.
Mary Louise Porter, a former general counsel for the Hershey Trust Co., lost her job in 2011 while Pacella was investigating the charity over the golf course purchase.
The Hershey Trust Co. recently put Marc Woolley, deputy general counsel, on indefinite leave after his September memo that disclosed board infighting and the resulting legal fees.
The Woolley memo and other documents were leaked to Pacella in late 2015, triggering Pacella's current investigation.
Ric Fouad, an alumnus who runs Protect the Hershey's Children Inc., which has sought reforms, said that "it's difficult to expect much from the [attorney general] when all their past acts made Hershey worse for needy kids but better for connected insiders. The same pattern will hold now without a fully reconstituted and volunteer board that puts children first. This is not Mark Pacella's fault. It's the fault of his politicized bosses."
Berning, also an alum, likes Pacella, but said "the Attorney General's Office has always been intimidated by wealth and [the trust's] ability to marshal legal resources to fight them. Let's face it. The Attorney General's Office has a budget and limited resources, and they would be up against a charity with seemingly unlimited resources and their biggest fear was a protracted legal battle that they would lose by attrition."
Only the attorney general can see it through, Berning said. And based on the past, he doubts the agency "has the will to call their bluff.
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Hershey history: Deal-breaker or sweet nothing?
Jul 8, 2016 | Central Penn Business Journal
I was on vacation when news broke that Mondelez International Inc. wanted to buy The Hershey Co., the chocolate maker that has dominated its namesake town for more than a century. So my perception may be distorted.
Nonetheless, it seems to me that the headlines were greeted with something of a shrug. Perhaps Hershey residents understand the politics better than I, and felt the Mondelez proposal was going nowhere.
They may have reckoned that The Hershey Trust Co., which owns a controlling stake in the chocolate maker, would never sell.
Asked about the news, Kent Jarrell, spokesman for the trust’s board, told CPBJ staff writer Roger DuPuis: “Unfortunately, I have nothing for you.”
And indeed, the company itself quickly swatted away Mondelez with a statement issued only a few hours after the offer became public.
It’s a stark contrast to the summer 14 years ago when the trust company was the one floating the idea of a sale. Controversy engulfed the town, still raw from the aftereffects of a strike by Hershey factory workers.
The relative quiet may hint at a deeper change in the relationship between public companies and the communities that host them.
Large companies still play a big role economically, don’t get me wrong, and Hershey would feel the loss of its signature company, just as Camp Hill will feel the loss of Rite Aid Corp. once it is swallowed by Walgreens.
But the emotional connections are weakening. And why wouldn’t they? Executives today largely view public companies as financial assets, not community assets.
Fewer executives, meanwhile, hail from the communities where their companies are based. That doesn’t mean they make bad neighbors, or are indifferent to their surroundings. But it throws up obstacles to deeper connections based entirely on place.
And given the economic roller coaster of this still-young century, you can’t blame companies for turning inward.
They’ve had to deal with the dot-com bust of early 2000, the aftershocks of Sept. 11, 2001, the downturn of 2008 and the sluggish recovery ever since. Not to mention the serial crises in the European Union, the slowdown in China, the list goes on.
There is a certain comfort in considering only the numbers.The next company town
Which is why I read with interest an article in this week’s Bloomberg Business Week about the relationship between Under Armour and its hometown of Baltimore, a city wracked by poverty and blight.
The company’s 43-year-old founder and CEO, Kevin Plank, is committing a significant amount of money to revitalize an area of Charm City. Plank hopes to use his fortune to make a positive mark on Baltimore's fortunes.
He faces both challenges and criticism, so it won’t be easy, especially as his company continues to chase Nike in the athletic apparel market.
But it wasn’t easy for Milton S. Hershey to plant a chocolate company in the Central Pennsylvania countryside. And it wasn’t easy to grow that company into an internationally known brand.
In other words, there is a lot of history in Hershey: The town and the company grew up together. That history is what brought people into the streets to fight the 2002 attempt to sell what was then called Hershey Foods Corp.
After the last few weeks, though, I’m wondering how much that history still means, both to the company and to the community.
Maybe they're both ready for a new chapter. Is the trust?The shopping ahead
It’s something of a new chapter in real estate right now, as you will discover in a look at the local market undertaken by Business Journal staff writer Jason Scott.
In a story for this week’s print issue, he describes how retailers and restaurants are driving up demand for smaller lots and filling in gaps in existing retail centers, or expanding beyond the established retail corridors of Central Pennsylvania.
Yes, that means you may have to drive farther down Carlisle Pike in Cumberland County or East Market Street in York County, to find the stores and restaurants you want.
The Inside Business section examines office culture and workplace design. Freelance writer Kate Harmon traveled in time to describe the office of the future, while staff writer Dave O’Connor hung out at the Candy Factory in Lancaster, and at other co-working spaces around the region.
The lists are self-storage companies, office-furniture dealers, and mail and packaging companies.
Find the week’s networking opportunities here.
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$23 Billion Was Not A Sweet Enough Offer For Hershey
Jul 8, 2016 | Seeking Alpha
By Cara Conwell
As many of you were made aware last week, there was almost an acquisition between two of the biggest parties in the confectionery industry. According to the Wall Street Journal, Mondelez International Incorporated (NASDAQ: MDLZ) contacted The Hershey Company (NYSE: HSY) offering them a buy-out at $107 per share. This approximately equals a $23 billion dollar offer to fully takeover Hershey. Throughout history, Hershey's seems to take a lot of pride in their brand. Hershey's declined the offer and said there is no further room for consideration at that price.
Mondelez, previously known as Kraft Foods, has had some questionable ethicswhen acquiring smaller snack manufacturers. Going back 6 years when the company was still Kraft Foods, they acquired Cadbury Eggs in a $19 billion dollar deal. With that deal, Kraft promised to keep production operations in the U.K. which ensured jobs and contributions to their economy. Within months after the acquisition, Kraft stopped operations in the U.K. and broke their promise.
Although Hershey's still has their pride and their chocolate, I think it was a mistake for Hershey's to pass up an offer like that. This article will first talk about the phenomenon that has been currently happening to both companies' stocks. Then, I will display and compare the two company's balance sheets. From all of this information, you will be able to see how I reached my conclusion. Hershey's definitely should have accepted the offer given the current state of their balance sheet, and if you own shares, I would consider selling at this time as well.
As expected, when the announcement was made June 30 it caused a lot of trading. The below graphs display the past 5 day performance of Hershey (left) and Mondelez (right):
As you can see, both companies have seen a positive stock performance ever since the offer was made. Mondelez had a more consistent and steady climb. In between June 30 and July 1, shares of Mondelez grew a little over 5%. On the other hand, Hershey had a very sudden and steep upward climb. At 10 AM on Thursday June 30, we could find shares of Hershey priced around $98. In just one hour we saw the stock grow over 16%, almost being traded at $115 per share. This is the highest Hershey's has found their stock trading at for the year.
Investors and potential investors have to understand that the 'hype' surrounding these two companies has caused the very sudden and dramatic climbs we have witnessed this past week. If you follow Hershey at all, you would know that shares have been underperforming for the year until this offer was brought to the table. I would strongly advise staying away from shares of Hershey at this time. The price has skyrocketed, and once the hype surrounding this offer simmers down I think shares of Hershey will rest where it has been most consistent for the year, around $95 a share.
Another observation I wanted to make prevalent when comparing these two companies are their balance sheets. The balance sheet offers a goldmine of information for potential investors. This financial statement displays the basic accounting formula; A = L + SE. In a perfect situation, there should be a little bit of both debt and equity. Debt is certainly an important thing in order to grow the company and expand into new waters. However, too much of it puts the company at more risk.
You can see that Hershey has taken on a lot of debt through 2016. As a matter of fact, about 83% of The Hershey Company's assets have been financed through debt as of last quarter. Also as of last quarter, Hershey's financed assets with debt at a rate of 6.39 times the amount of equity.
Through some research, I discovered that Hershey has been expanding into China. Two years ago, Hershey acquired Shanghai Golden Monkey foods to be their guide into Chinese consumers' snack cabinets. However, in 2016 things have not been a smooth ride in Asia. China has been dealing with a small dent in their economy. The effect of this turmoil has rippled into the average Chinese households, causing less spending on candy and other sweets.Outside of the U.S in developing regions, Hershey accounts for about 17% of its revenue. Although a smaller amount, Hershey's sales have not been up in U.S. as well.
As you can see, annual candy consumption in the United States has gone down. As time goes on, Americans seem to be more cautious with what they are eating. This is one trend that I find harms Hershey's sales revenue. Another logical explanation is that cocoa beans have become more expensive. Since Hershey is paying more for their cocoa, they will charge more for their chocolates. The American consumer seems to be heading towards a healthier and cheaper snack. The hiccup in sales within the U.S. and Asia are why I believe Hershey's financial performance has been down in recent years. In 2015, revenue declined marginally from $7.42 billion to $7.39 billion. Profit also dropped 39% at this time, from $817 million to $513 million.
I believe that Hershey's debt levels are so high because of this recent underperformance we have witnessed. High debt levels combined with fewer sales may have discouraged stockholders. This ultimately has caused stockholder's to sell shares. This explains why we see stockholder's equity go down through the most recent quarters and debt levels go up. An ideal balance sheet in the confectionery industry should look like Mondelez. The snack giant has a closer ratio between the levels of debt and equity, which is way more ideal to work with and watch in terms of growth.
As you can see, the hype surrounding this potential deal has really artificially rose Hershey's share price. The high levels of debt they have had these past couple of years have really discouraged trading through a large portion of 2016 thus far. The price is suddenly through the roof right now because of this social phenomenon, which is why I suggest avoiding any thoughts of picking up shares now. If I currently held shares of Hershey, I would strongly consider taking advantage of what this social phenomenon has done to the price and selling your shares. You are not going to get many opportunities to sell Hershey over $110 a share when they finance their assets with 83% debt. Given Hershey's recent expansion, their decrease in overall sales, and the amount of debt they have taken on; you can see why I believe $107 a share was a fair offer on June 23. Hershey will not pay off this debt overnight, and shares will fall back down below $100 a s hare as soon as investors realize that. Mondelez, on the other hand, seems like they want to take on that challenge. Keep a watch on these two companies in the near future - I believe that Mondelez is not done making offers for Hershey.
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