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Nestlé quells Hershey bid talk

28-Aug-2002

Food giant Nestle yesterday moved to quell market speculation it was poised to launch a top-dollar bid for US chocolate maker Hershey Foods, suggesting it would only pursue deals that met certain growth and cost criteria.

Following an analyst presentation in New York, Nestle executives reiterated their aim of generating real internal growth of at least 4 per cent and a cost of capital of no more than 8 per cent from any acquisition, according to analysts and investors who spoke with the executives.

 

Some industry analysts said that would equate to a bid of about $80 (€81.6) per share, or $10.9 billion, for Hershey, less than some had hoped.

 

The comments helped dampen investor enthusiasm that Nestle might bid as much as $12 billion while fuelling speculation that Hershey's high price demands had thrown the auction into doubt.

 

News leaks about details of a possible offer have made Nestle, the world's largest food group, "furious" as it sees them as attempts to push up the price of any Hershey acquisition, a source close to Nestle told Reuters.

 

On Monday, USA Today quoted unnamed sources as saying that Nestle had presented a preliminary bid of $82 to $85 a share, which helped push Hershey shares up 2.36 per cent.

 

In the analyst presentation yesterday, monitored by phone in Zurich, Nestle's head of investor relations, Roddy Child-Villiers, declined to comment on the story, which a company spokesman previously described as "market fantasy."

 

"There are a lot of transactions we look at that in fact we do not progress with," Child-Villiers said. "You only ever hear about the ones we do progress with, but I can assure you that many never see the light of day."

 

Investors attending the presentation said Nestle declined to divulge much about its intentions on Hershey. "They didn't give too much of an indication either way," said one investor, who asked not to be named.

 

"Regarding Adams, Hershey and the Kit Kat license we cannot make any comment,"said Child-Villiers. "As and when and if we ever do, we will do so through appropriate channels."

 

Nestle is also interested in Pfizer's Adams unit, which went on the auction block in June, though talks have slowed until the Hershey situation is resolved, sources familiar with the situation said.

 

The Adams division, which makes everything from Certs mints and Trident gum, is expected to garner bids in the $4 billion to $5 billion range, making it a more affordable option than Hershey. It also would satisfy Nestle's goal of establishing a larger US presence.

 

Nestle also wants back its US Kit Kat business, currently operated under license by Hershey. But Nestle should regain that no matter who takes over the famous US maker of Hershey's Kisses under the license's change of control agreement.

 

Nestle and Kraft Foods have long been tipped as the two strongest bidders for Hershey. Reuters has reported that a third bidder, Cadbury Schweppes, was leaning toward bidding only for any Hershey brands that might be divested and concentrating on the Adams sale.

 

While any deal involving Hershey would make strategic sense because of Nestle's relative weakness in the big US market, there are concerns that Nestle's purchase will lead to earnings dilution and it would lose its top AAA credit rating.

 

Chief financial officer Wolfgang Reichenberger appeared to backtrack on Tuesday from earlier statements by saying Nestle would not give up its top rating "too lightly." Nestle had earlier said its rating was not its top priority.

 

Any Hershey deal will also likely be protracted because of US political opposition to a deal and likely antitrust issues. A combined Nestle-Hershey business would control more than 50 per cent of US chocolate confectionery market.

 

Reichenberger reiterated that Nestle would not sacrifice profit margins for the sake of sales growth this year and said the company was working to improve weak margins in Europe.

 

Nestle brands include Nescafe coffee, Kit Kat and Friskies pet food. Kraft brands include Philadelphia cream cheese, Toblerone chocolate and Maxwell House coffee.

 

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