Hershey Foods may be up for sale

July 25 — There may be a big deal stirring in candy land. The trust that controls Hershey Foods Co., an American icon that is the nation’s largest candy and chocolate maker, is exploring a sale of the company, it said in a press release Thursday. Sources familiar with the matter said such a deal could fetch more than $10 billion.

For years, the storied company has been a bystander during a food-industry consolidation, widely regarded as untouchable because of the trust’s loyalty to its mission and its hometown of Hershey, Pa. But now tumult in the corporate world has prompted it to consider changing course.

Hershey’s corporate board met Wednesday evening to discuss the matter. It is understood to have given a tentative green light to looking at alternatives that included a sale. Feelers have already been sent to prospective buyers.

The plans for a sale could be suspended, however, under certain circumstances. One would be if the rocky stock market should deter bidders from making rich offers. The reaction of local residents and employees to the plan could also prove a complication.

The Milton Hershey School Trust, which owns 31.4% of Hershey’s outstanding common shares but roughly 76% of the voting stock, is keen to diversify its assets, roughly half of which are Hershey shares.

At a time of corporate disasters such as Enron and a wildly volatile stock market, charitable trusts and foundations are under pressure to rethink their investment strategies and diversify for protection. Another foundation considering diversifying is the David and Lucile Packard Foundation in Los Altos, Calif., which holds stock only in Hewlett-Packard Co. and an H-P spinoff, Agilent Technologies Inc. That foundation’s board decided in June to drop its longstanding opposition to diversification, though no detailed plan is in place.

Adding pressure are some state attorneys general, the regulators of private charitable trusts, who are nudging the trusts to diversify to safeguard their beneficiaries.

The prime beneficiary of the Hershey School Trust is the Milton Hershey School, set up by the company founder in 1909 to serve disadvantaged students and now a lavishly appointed institution. Word of a sale could anger the powerful alumni network and other interests, who might see it as a betrayal of Mr. Hershey’s vision.

Should the board decide to ask for bids, it would become the largest auction of a food company since Nabisco Holdings Corp. went up for sale two years ago. Nabisco, owner of brands such as Oreo and Ritz, sold for $14.91 billion to Philip Morris Cos.’ Kraft unit, now a separate publicly traded company. A sale of Hershey would continue an intense consolidation that has seen companies from Nabisco to Ralston Purina to Bestfoods gobbled up by multinational giants. Hershey declined to comment on a possible sale.

With companies such as Kraft, Nestle SA, PepsiCo Inc. and Cadbury Schweppes PLC eager to expand into the fast-growing snack portions of their business, Hershey could be the subject of a bidding war, even though corporations are generally shying away from big acquisitions these days. Hershey has $4.6 billion in annual sales, making it much smaller than the food behemoths. But the maker of Hershey’s Kisses, Reese’s Peanut Butter Cups and Jolly Rancher candies has a commanding 31% share of the U.S. confectionary market. “Such businesses don’t come on the block very often,” says a person close to one of the potential bidders.

STOCK REBOUND The news of a possible sale could add luster to Hershey stock, which hit a 52-week low of $56.45 this week but rebounded after the company reported better-than-expected quarterly earnings. Amid Wednesday’s big stock-market rally, Hershey rose $2.67 a share to close at $62.50 in 4 p.m. New York Stock Exchange composite trading.

Reaction is apt to be far more grim in Hershey, the company town founded by Mr. Hershey, where street lamps are shaped like Hershey Kisses and streets bear names such as Chocolate Avenue and Cocoa Avenue. In April, factory workers rattled by proposed health-plan changes authorized a strike, the first in 22 years. Affecting a fifth of the work force and idling two plants, the strike turned into a personal attack against Richard Lenny, the first outsider to run the company. Signs labeled the Nabisco veteran an insensitive cost-cutter, declaring he was “One Lenny Too Many.”

While many drivers in the town of 13,000 honked in solidarity with strikers, other residents, including some retired Hershey executives, quietly criticized picketing employees for a sense of entitlement. At the annual shareholders’ meeting, held during the strike, nervous retirees left their velvet seats in the Italianate Hershey Theatre to avoid a rancorous exchange between workers and Mr. Lenny. The 50-year-old CEO, who had hired bodyguards, told attendees, “I’m here to do what the shareholders want me to do, which is to increase shareholder value.”

According to someone familiar with the situation, Mr. Lenny initially resisted the idea of a sale. This person says Mr. Lenny urged the trust to consider alternatives, such as a buyback or major recapitalization that would reduce the trust’s stake, with the corporation buying some of its shares at a premium. The trust rejected those plans, however. It and the company’s board have in recent weeks come to an amicable resolution. They provisionally agreed to work together in seeking a sale of the company.

POISON PILL The trust apparently has been getting restive for a while. Hershey’s board adopted a “poison pill” shareholder-rights plan in 2000 to block an unwanted sale. The move indicated to potential buyers that the company wasn’t certain the trust would say no if approached with an offer. “That was our first inkling of a difference of opinion or strategic vision between the trust and the company,” says one industry executive.

Then there were rumblings in the food industry six to eight months ago that the trust was looking to diversify its holdings and had hired an investment bank to advise it on a possible sale. That’s a departure from the norm. Many venerable companies in the food, drug and newspaper industries have found charitable trusts to be a source of protection. For instance, Kellogg Co. has been able to count on its largest shareholder, the W.K. Kellogg Foundation Trust, to fend off unwanted suitors.

But the Hershey School Trust started to grow concerned more than a year ago about its fiduciary duty to beneficiaries as it watched the technology bubble burst, says someone familiar with the matter. The meltdown of Enron and telecom stars such as WorldCom Inc. added to concerns. The trustees felt “they had a responsibility” to the beneficiaries, and exploring a possible sale was the best option, this person says.

At the same time, the trust had been gradually reducing its stake in Hershey, lowering Hershey stock to 50% of the trust’s total assets from 80%. The federal tax code encourages private charitable foundations to diversify their holdings and includes penalties for investments that “jeopardize” an organization’s charitable mission, such as putting too much money into a single stock. But the Internal Revenue Service seldom pursues such cases.

Attorneys general in some states, relying on state laws requiring that foundations invest “prudently,” have become increasingly interested in the holdings of private charitable trusts and sometimes pushed them to diversify. People familiar with the matter say that Pennsylvania Attorney General Mike Fisher’s office, while not advocating a sale of the company, has urged the Hershey trust to diversify.

A spokesman for the office declined to comment on whether anyone there had talked to the Hershey School Trust about diversifying. Mark Pacella, the chief deputy attorney general charged with overseeing charitable trusts, said that in general, “there has been no new push on our part to force diversification as a policy matter.” But he said current market conditions have underlined “the age-old proposition that diversification is almost always a hallmark of prudent portfolio management.”

Hershey began life in 1894 as a subsidiary of Milton S. Hershey’s caramel factory. After deciding that “caramels are just a fad,” he set out to mass-produce milk chocolate candies.

PHILANTHROPIST, ENTREPRENEUR Mr. Hershey was considered as much a philanthropist as an entrepreneur. His Mennonite background led the son of German immigrants to believe businesses and their leaders were morally obligated to share their wealth with society. So as he built the chocolate company he raised a town as well, erecting a bank, a department store, churches, golf courses, a zoo and a trolley system — public accoutrements that were all completed by the early 1900s. Then he and his wife, Catherine, founded a school for orphan boys, now called the Milton Hershey School.

Its alumni have often been at loggerheads with the school’s board over the interpretation of Mr. Hershey’s vision for the town — issues likely to heighten tensions in the event of a sale. In 1963, when the Milton Hershey School Trust donated $50 million to start the Hershey Medical Center, critics wondered if the development of a hospital was respectful of Mr. Hershey’s mission.

Building the center “changed the nature of the town,” says Spiro Stefanou, a professor at Penn State who has studied the company for years. “You started to have a different kind of person in town — instead of [just] workers there were doctors.”

And now, perhaps, different corporate stewards. Among the companies likely to be interested in Hershey is Nestle, which owns the KitKat brand of chocolate-coated wafers and licenses it to Hershey. The brand is subject to a change-of-control agreement, and opinion is divided on whether the license would be terminated in the event of a sale. Hershey would be likely to contend the rights were included in any sale of the company, but Nestle could see it differently, resulting in a complicating factor to any sale.

With its deep pockets and ownership of KitKat, Nestle might be able to outbid most rivals if it chose. However, the Swiss food giant has long wanted to maintain its AAA credit rating, something that a big acquisition could jeopardize.

Kraft, meanwhile, has shown an ability to grow successfully through acquisitions. The new CEO of Kraft parent Philip Morris, Louis Camilleri, has indicated that he sees strategic purchases as a means to boost the food giant’s growth rates. Kraft, which has only a small confectionery business in the U.S., has been particularly focused on increasing its snack-food offerings.

Jaine I. Mehring, an analyst at Salomon Smith Barney, speculated in a report earlier this month that bidding for Hershey could rise to $80 a share. That would mean a price tag for the deal of nearly $11 billion.

Should a sale come to pass, it could threaten to overshadow another big deal in the candy world: Pfizer Inc.’s sale of its Adams confectionary business, which includes Dentyne and Trident chewing gums and Halls drops. Pfizer recently hired financial advisers to sell the business and kicked off an auction that industry experts say could fetch as much as $4 billion.

Potential bidders for Adams include Nestle, Kraft, Cadbury Schweppes and Wrigley. If the same bidders were preoccupied with a potential Hershey sale, the Adams deal could receive less attention. Cadbury’s CEO, John Sunderland, says the company will probably take a close look at Adams.

A purchase of Hershey would probably end the tenure of Mr. Lenny, an executive with a better reputation on Wall Street than on Chocolate Avenue. Mr. Lenny set out to make the company’s main candy brands more profitable in the model of Mars Inc. and Wrigley, confectioners whose profit margins have historically exceeded Hershey’s. Mr. Lenny fretted that the company had been “too democratic,” with near-equal marketing budgets across its brands. On Wall Street, analysts applauded his approach, which also which included selling more products through convenience stores and shedding several non-chocolate brands.

But in Hershey, where Mr. Lenny was suspiciously viewed as the first outsider CEO, employees grumbled about his decision to close factories and eliminate more than 800 jobs, while using phrases such as “ZOG,” for “zero overhead growth.” Such moves, which contributed to the personal attacks against Mr. Lenny during the recent strike, would have been unthinkable under the conservative, up-from-the-trenches management of the past.

The story inexplicably left out Richard Lenny's first name.

I'm of two minds about this. I own Hershey Foods stock. But....

As I post this HSY is trading at $75.36.

As a resident of the Hershey PA area... I hope we have better luck with whomever the acquirer turns out to be. AMP was the largest employer in the region-- they were bought out by Tyco (Allied Signal was also in the bidding). Tyco, the supposed "white knight", really harmed the local economy.

Look for lot's of similar acquisitions. (Slimy company's buying up honorable ones.) Look for simple-short sales cycles of a tangible product that is easy for accountants to validate figures for sales and profits. Things like candy bars, dairy products, tires, auto parts, small appliances, furniture, etc... Then those CEO's can use low-tech quality companies to provide cover while importing those "past year's cooked books" into the squeeky clean ones.

Suddenly ethics adds quite some value to a company's name. Kind of like Marc Rich marrying Mother Theresa. It will magically transform Marc Rich into an honorable man, while destroying Mother Theresa.

Every month I have to import our groceries to Wisconsin from Pennsylvania via the UPS man. Lot's of Tastykakes. Thank God for the internet order. Scrapple comes next. Usually five pounds. Good bread is hard to find in Wisconsin too! I wish someone could make a Hogie in this state. And for the concept of a cheesesteak.....I have given up. I miss those street corner soft pretzel vendors too!

IMHO, Philadelphia folded long ago. The traditions that held it together in lieu of a government are falling by the wayside. Tastykake, Pep Boys, Bookbinders, and the Italian Market can only prop the city up for so long.....

As a resident of the Hershey PA area... I hope we have better luck with whomever the acquirer turns out to be.

Don't bet on it. Any of the globalist companies would likely buy the Hershey brand names, but shut down the town and move operations to Canada so they can "legally" import Castro's sugar.

Any sale of Hershey Foods would be disasterous to the company and the town.... IMHO... say goodbye to the stable company and watch its assets be looted... and it would be a shame to see....

Maybe we should cut the sugar subsidy so they don't have to move!!

Maybe we should place a uniform revenue tariff on ALL imports and correspondingly reduce the corporate income tax. Interestingly, that would likely negate the need for sugar subsidies as well.

The guardians of the Trust Funds have recently become more liberal and PC. Some of their changes are starting to destroy the Milton Hershey school(which used to be a true model of private service to the needy, turning orphans into very productive and responsible citizens), attempting to remove the Christianity influences and values.

They already removed much of their trademark farm work programs that for years taught discipline quite well. Also been a shift into building more pompous facilities instead of serving more needy orphans. Not to mention a bubbling scandal involving which children are accepted(counter to the founding principles. The alumni have for a while now been understandibly furious.

as a past student of MHS> in the 50s this a very sad thing to here the school taught me responsability for my actions and the only way to get a head in life was through hard work .It seems to me that the people running the company now should look at what MR> MILTON HERSHEY would think about how his co. is being run and how the admintistraion of the scool is turning the school into aplace for gifted children instead of children with real needs this all comes down to one thing money for the people at the top who will move on to more when its over. all hail to you MH.from a loyal son

That school was a shining star, I have tremendous respect for Milton Hershey, and those that followed in his footsteps. I hope that you and the other alum's can save it and restore it to the right path.

Interesting you should mention AMP. The only two times I was in Hershey (and stayed at the Cocoa Inn) was to do business with AMP Capitron down the road in Elizabethtown. I really loved the countryside that summer. I was visiting from my employer in Arizona--quite a difference )B^).

Harley Davidson also had a quality control/production planning school there. It was fun. I still have that AMP toll free number to customer service for free samples of any connector under 100 pcs. We bought a PCB terminal staking machine from them at the time. A real nasty beast. I suspect they employed every mechanical engineer who had a pinache for the complex when designing it. I think the one machine depleted all the cams, followers, slip clutches, microswitches, rams, and air valves that were world war II surplus.

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