Off topic : WSJ -- Hershey Foods Is Considering A Plan to Put Itself Up for Sale
[If this company is indeed sold, the buyer better not screw it up. I sure hope it is not some icky company like Procter & Gamble. Jon.]
July 25, 2002
Hershey Foods Is Considering A Plan to Put Itself Up for Sale
By SHELLY BRANCH, SARAH ELLISON and GORDON FAIRCLOUGH
Staff Reporters of THE WALL STREET JOURNAL
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 Mr. 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.
-- Robert Frank and David Bank contributed to this article.
Write to Shelly Branch at shelly.branch@wsj.com, Sarah Ellison at sarah.ellison@wsj.com and Gordon
Fairclough at gordon.fairclough@wsj.com
Updated July 25, 2002 6:59 a.m. EDT
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