Hershey Media Report 7/22/16

Local Coverage

1. Deadline looming for Hershey Trust board to resolve 'matters of concern'

   Jul 21, 2016 | Pennsylvania Live

   By Nick Malawskey
   
   
   At some point in the next 10 days the board of the Hershey Trust will face a reckoning with the Pennsylvania Attorney General's office. In February, Attorney General Kathleen Kane's office gave the now nine-member board of the Hershey Trust a July 31 deadline to resolve a series of issues related to a 2013 agreement between the two entities, which itself followed a two-year investigation by the Attorney General's office into the inner workings of the trust.

Trade Coverage

2. Our view: Changes insulate town from affects of would-be sale

   Jul 22, 2016 | Central Penn Business Journal

   Diversification. It’s a word we hear every time some corporate giant swoops in to buy a public company in Central Pennsylvania. It is meant to reassure us that our economy is strong enough to withstand the loss of a large enterprise.
3. Credit Suisse: Mondelez bid created 'new sense of urgency' at Hershey

   Jul 22, 2016 | Food Dive

   By Carolyn Heneghan
   
   
   The drama of Hershey's rejected takeover bid from Mondelez is expected to "spur a new sense of urgency at the Hershey Co. to boost shareholder value and improve fundamental performance," Credit Suisse research analyst Robert Moskow wrote in a report this week.

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Local Coverage

1. Deadline looming for Hershey Trust board to resolve 'matters of concern'

   Jul 21, 2016 | Pennsylvania Live

   By Nick Malawskey

   At some point in the next 10 days the board of the Hershey Trust will face a reckoning with the Pennsylvania Attorney General's office.

   In February, Attorney General Kathleen Kane's office gave the now nine-member board of the Hershey Trust a July 31 deadline to resolve a series of issues related to a 2013 agreement between the two entities, which itself followed a two-year investigation by the Attorney General's office into the inner workings of the trust.

   Among the chief requirements — that the trust be reimbursed for all fees and expenses related to an internal investigation (believed to have totaled more than $650,000) regarding the internship of a board member's son by one of the trust's investment managers; that all board members who have served 10 or more years resign; and that board compensation be reduced.

   Beyond those major concerns, the Attorney General's office also said there were "matters of concern" related to board members conduct and abrupt resignations.

   The deadline comes amid reports of board infighting, the resignation of a board member within the last month, and the attempted purchase of the Hershey Co.(which is owned in part by the trust) by an outside company. One top trust official was also fired ahead of federal charges (not trust related), while another was placed on indefinite leave in June.

   The Hershey Trust board oversees the Hershey Trust Co., which manages the $12 billion-plus endowment left by Milton S. Hershey to fund the private Milton Hershey School in Derry Township. It includes a controlling stake in the Hershey Co. and outright ownership of Hershey Entertainment & Resorts company.

   it operates through a series of interlocking boards — the school board, the trust company board, the board of the chocolate company and the board of the entertainment company. Both the school and the trust company share the same board members, while some members also sit on the boards of the two for profit companies.

   In the most recent tax filings available (July, 2014), trustee compensation ranged from a low of $73,000 to more than $500,000 for Hershey Co. Board Chairman James Nevels. 

   Internal letters leaked to the press have described an air of dysfunction and infighting among the charity's board of governors. One, purportedly written in September 2015, included notes from a phone conversation between Trust Chairman Robert Cavanaugh and the now-ousted trust official, Marc Woolley. 

   In the letter, Woolley said Cavanaugh was threatening to "take out" other board members who "had run a smear campaign" against him. Cavanaugh is one of three board members who have served more than 10 years on the board. The other two are Velma Redmond and Joseph Sensor.

   Spokesmen for both the board and the Attorney General's office have repeatedly said throughout the summer that the two entities are continuing to have conversations regarding the matters raised by the February letter from Kane's office.

   In a statement on Thursday, both parties reiterated that position. Jeffrey Johnson, Attorney General spokesman, said that "we are working to make sure the mission of Milton Hershey is fulfilled. Our goal is to achieve a long term solution that will ensure that occurs."

   Kent Jarrell, a spokesman for the Hershey Trust Co. board, said the trust hopes to have a resolution soon. 

   If the past is any indication, both the trust and Kane's office are likely to reach some form of settlement agreement. Whether that includes all of the reforms sought by the Attorney General's office remains to be seen.

   If the two parties cannot reach an agreement, Kane's recourse would be to file a complaint in Dauphin County Orphans Court, which has jurisdiction over the trust, Michael Hussey, a professor at Widener University Commonwealth Law School, said Thursday. The trust would then be called before the presiding judge to justify its actions.

   "I doubt either side wants to get to that point," he said.

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Trade Coverage

2. Our view: Changes insulate town from affects of would-be sale

   Jul 22, 2016 | Central Penn Business Journal

   Diversification. It’s a word we hear every time some corporate giant swoops in to buy a public company in Central Pennsylvania. It is meant to reassure us that our economy is strong enough to withstand the loss of a large enterprise.

   We heard it in Harrisburg after Tyco Electronics took out AMP. It has been heard repeatedly in Lancaster and York as large manufacturers in both counties pulled back or moved away. We’ll hear it in Cumberland County after Rite Aid Corp. is absorbed into Walgreens.
   
   And don’t be surprised if you start hearing the word more often in Hershey, the very definition of a company town. In late June, global food company Mondelez International offered to buy The Hershey Co., an offer that was knocked down as quickly as it surfaced.
   
   But the offers aren’t likely to end, and sooner or later, someone is going to buy the most recognizable name in chocolate. 
   
   There is simply too much value in Hershey and its brands for would-be corporate suitors to keep their hands off. And the directors of the Hershey Trust Co. may eventually realize they need to focus more on running the school, less on owning a public company. 
   
   To be sure, a sale would deliver an emotional and economical blow to the town and the region, striking one of the key pillars of our identity, a pillar that has stood for more than a century. Residents rightly wonder if tourists would still line up to ride the roller coasters and splash in the water park.
   
   The fears are misplaced. As staff reporter Roger DuPuis reports in this week’s front-page story, the town’s economy has been diversifying for years. In Hershey, as in communities around the U.S., health care and hospitality have grown in scope, while manufacturing has shrunk. 
   
   The changes bring challenges, of course, as service jobs don’t always offer the same wages and benefits as the manufacturing jobs they replace. But they are not challenges Hershey is facing alone. 
   
   What about the tourists? Let’s just say Americans are unlikely to lose their taste for a town built on chocolate.

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3. Credit Suisse: Mondelez bid created 'new sense of urgency' at Hershey

   Jul 22, 2016 | Food Dive

   By Carolyn Heneghan

   Dive Brief:The drama of Hershey's rejected takeover bid from Mondelez is expected to "spur a new sense of urgency at the Hershey Co. to boost shareholder value and improve fundamental performance," Credit Suisse research analyst Robert Moskow wrote in a report this week. Credit Suisse has since raised its 12-month target price for Hershey to $110 per share, up from its previous $91 target. Mondelez's takeover offer earlier this month was $107 per share, or about $23 billion.Moskow said that while "Hershey management will feel sufficient pressure from shareholders and its board to provide a palatable alternative to selling the business outright," the company has several options besides an outright sale.Dive Insight:

   Moskow's suggestions included that Hershey could rein in its emerging market investments, put in place stricter trade promotion guidelines, initiate stricter zero-based budgeting policies, or restructure its supply chain by leveraging its 2014 acquisition of Allan Candy, a Canadian manufacturer that was already producing Hershey brands like Lancaster and Jolly Rancher. 

   These moves wouldn't necessarily spur much top-line growth, Moskow said. In the latest reported quarter, Hershey saw sales decrease 5.6%, the third consecutive quarter of sales declines, so any top-line growth would be a welcomed change for the company.

   But these initiatives could shift investors' focus to margin expansion and EPS growth, which could ease calls for a sale and restore investor confidence. Net income fell to $229.8 million, or $1.06 per share, last quarter from $244.7 million, or $1.10 per share, in the same quarter last year.

   Mondelez itself knows this concept all too well. In the past, the company's CEO Irene Rosenfeld has expressed her frustration with activists' demands to sell the company, even as Mondelez pursued further margin expansion.

   Moskow wrote that Credit Suisse's consensus view matches what many other analysts believe: Mondelez may come in with a higher offer, and such an offer would put more pressure on the Hershey Trust to consider a sale.

   Moskow also iterated that Credit Suisse feels more board resignations may come as Pennsylvania's attorney general continues an investigation into the trust. Those resignations may lead the company to bring onboard outsiders with no ties to the state, which makes a Mondelez takeover more likely.

   However, the state's attorney general still holds the power to block a sale even if the trust approves, so the deal's probability remains low, Moskow said.

   Back in December, Moskow wrote in another report that Hershey may be considering an outsider to replace CEO J.P. Bilbrey and speculated whether Hershey would jump on the industry consolidation trend.

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