Hershey Merger Talks Melt: Did High Cocoa Prices, Mondelez Buyback Program Hurt Deal?

Bank of America Securities and other experts are weighing in on the breakdown in merger talks between The Hershey Co. (NYSE:HSY) and Mondelez International, Inc. (NASDAQ:MDLZ). 

What Happened: Early Wednesday morning, Mondelez announced a new $9 billion share repurchase program. The Chicago-based company also addressed its M&A strategy while reports of deal discussions with Hershey swirled.

In a press release, Mondelez confirmed that it remains “committed to its key capital allocation priorities.” Those priorities include “reinvesting in brands and capabilities, returning capital to shareholders through share repurchases and dividends, and M&A.”

Its acquisition strategy will focus on bolt-on assets similar to recent purchases of Chipita, Clif and Ricolino.

Later on Wednesday, it was reported that Hershey Trust Co., which holds 80% of the voting power in Hershey Co., turned down a preliminary bid from Mondelez. Hershey said the offer was too low, according to Bloomberg. 

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Expert Insights: Steve Powers, Deutsche Bank managing director, told CNBC on Thursday that Mondelez is facing several challenges including high cocoa and coffee prices which may be one of the drivers behind the company’s merger strategy.

Cocoa prices have more than tripled over the past year, climbing 20% from October to November alone. Cocoa prices have been driven higher by adverse weather conditions in regions where its grown, decreased global inventories and supply uncertainty.

BofA Securities analyst Peter T. Galbo made similar observations on the price of cocoa and highlighted Hershey as an attractive merger candidate for global confectionary companies due to its strong North American market share and modernized manufacturing network. 

Galbo also noted that self-help has been a recurring theme in consumer staples and portfolio reshaping through mergers, acquisitions and divestitures is prominent in the industry when companies seek new growth opportunities.

MDLZ Buyback: The BofA analyst said Mondelez's newly announced $9 billion share repurchase authorization was likely coincidental and unrelated to merger talks with Hershey. 

He pointed to funds received from its sale of JDE Peet's, recent stock performance and only $2.8 billion remaining on its prior authorization as the most likely factors contributing to the expanded buyback program.

BofA Securities analyst Peter T. Galbo maintained a Buy rating and $82 price objective on Mondelez stock.

Price Action: According to Benzinga Pro, Hershey shares are down .11% at $183.75 in pre-market trading Friday.

Mondelez shares are down 0.69% at $62.20 at the time of publication Friday.

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