Chocolate giant Hershey rejects massive Mondelez bid

Mondelez International (MDLZ) will have a battle on its hands if it is to succeed in acquiring Hershey (HSY), a deal that would create the world's largest candy maker.

Hershey, the iconic U.S. chocolate giant, on Thursday rejected an unsolicited bid from Mondelez, which makes Oreo cookies, Wheat Thins crackers, Chicklets gum and a range of other products. In a statement, Hershey said its board of directors "carefully evaluated the indication of interest it received from Mondelez and "determined that it provided no basis for further discussion between Mondelēz and the company." Hershey also said it is committed to enhancing shareholder value.

Mondelez's cash-and-stock offer for Hershey, which makes its eponymous bars and Reese's Peanut Butter Cups, among other sweets, values the company at $107 a share. Informal talks between Mondelez, which was spun off from Nabisco in 2012, and Hershey have been underway for the past few months, though a formal offer wasn't presented to Hershey until recently, according to a person familiar with the situation.

"Mondelez's interest in the U.S. chocolate space... is far from a surprise," said Morningstar analyst Erin Lash in a note to clients. "Despite its tie-up with Cadbury more than six years ago, Mondelez has essentially been locked out of the U.S. chocolate category because Hershey acquired the rights to the Cadbury U.S. brands in 1988 in a deal that management has called 'ironclad.'"

Hershey shares surged almost 16 percent in early afternoon trading after news of the offer was first reported by The Wall Street Journal and CNBC. The company's shares recently traded at $111.87, suggesting that Hershey may hold out for a higher bid.

Hershey was founded in 1894 by Milton Hershey and remains controlled by a charitable group, the Hershey Trust, that bears his name. Mondelez sports a market valuation of more than $69 billion. Its shares also rose on the news, indicating that Wall Street is keen on the potential deal.

In hopes of persuading Hershey Trust to sanction its bid, Mondelez is offering to base the combined chocolate operations of both companies in Hershey, Pennsylvania, and to rename the merged business "Hershey," said a source close to the deal.

A spokeswoman for Mondelez said it was against company policy to comment on "rumors or speculation."

Whether joining forces with Mondelez would amount to a sweet enough deal for the Trust, which owns 8.4 percent of Hershey's stock and 81 percent of its voting power, is hard to say. In 2002, the Trust rejected a $12.5 billion takeover bid from chewing gum maker Wm. Wrigley Co. that it was on the verge of accepting after alumni of the Milton Hershey School, which is funded by the Trust, Pennsylvania's attorney general and others raised objections.

Hershey Trust CEO Ed Henry didn't immediately respond to requests seeking comment for this story.

Despite that past resistance to a takeover, Hershey faces pressure from investors to boost growth. Earlier this year, the company lowered its 2016 earnings guidance because of lackluster demand for its products in both the U.S. and China.

Hershey controls about 45 percent of the U.S. chocolate market, according to Morningstar. Mondelez is the corporate parent of Cadbury chocolate, which has a big presence in overseas markets. The company was spun off from Kraft Foods (KHZ) in 2012.

Packaged food companies have seen sales slide in recent years, with consumers increasingly demanding fresh, healthier ingredients. Last year, Kraft Foods merged with H.J. Heinz in a deal arranged by Warren Buffett's Berkshire Hathaway (BRK.A) and 3G Capital, creating North America's third-largest food and beverage company. Buffet and 3G teamed up to acquire Heinz in 2013 for $23 billion.