Hershey Takeover Called Unlikely; JV May be Only Option

Ever since Mars announced that it was buying Wm. Wrigley Junior, speculation has swirled around Hershey. It was ripe for takeover, the thinking went.

But will it be bought? And more to the point, should it be?

Goldman Sachs analyst Judy Wong, in a note issued on Tuesday, says "probably not" to both questions. Even a joint venture seems unlikely, she says.

Her reasoning is largely based on the vast differences between Hershey and Wrigley. The latter company has global tentacles reaching into remote developing economies. Not so Hershey, which she also says is overreliant on products that won't see much future growth and that carry low profit margins.

Hershey's stock is also pricey, and, she notes, and is tightly controlled by the Hershey Trust, posing a daunting challenge for would-be suitors.

As for joint ventures, Hong says that the company's existing relationships with Cadbury and Nestle don't leave much room for new ones. Hershey holds licenses to sell some of those companies' bands in the United States. That doesn't seem like a good argument, though -- there are still several areas in which Hershey and either of those companies, or any number of others, could tie up.

Hong isn't alone. Among the other analysts who think the speculation frenzy is all wrong is Jonathan Feeney of Wachovia, who said in a note last week that Hershey's reliance on the slow-growth U.S. market makes it an unattractive target.

Analysts at Sanford Bernstein, meanwhile, said last week that either Nestle or Kraft Foods would make a fine partner for Hershey.

Among the options Hershey could pursue, the analysts said, are a full-on merger with Nestle; another joint venture with Cadbury to put it into the U.S. gum business; or an acquisition of its own, perhaps of Kraft's confectionery business. The only problem there, the analysts say, is that Kraft probably doesn't want to sell.

The only thing that's clear is that Hershey, loaded with hoary, low-margin products, holding little cash, and dependent on slow-growth markets, has to do something. Despite all the speculation, Hong is right that a takeover of Hershey is highly unlikely given the Hershey Trust's iron grip on the stock. With so little out there for Hershey to buy, the most likely outcome seems to be some kind of joint venture.