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Wrigley takeover renews pressure on Hershey

By Chris Jones , 28-May-2008

Last month's surprise takeover of gum maker Wrigley by confectionery giant Mars has led to renewed speculation over the future of arch rival Hershey.

A poor performance in 2007 - due to a combination of higher costs caused by a major restructuring programme and the sharp rise in commodity and fuel costs, which shaved three per cent off margins - has left the flagship US confectionery group looking vulnerable. This, coupled with the increased competition that a merged Wrigleys/Mars will bring, has prompted renewed speculation that Hershey will be forced to team up with one of its European partners - Nestlé or Cadbury - in order to survive. Hershey, famous for its eponymous bars, Hershey Kisses and Reese's Peanut Butter Cups, among many other brands, recognised that it has struggled to perform as well as its rivals over the last year. "It is clear that some of our competitors have done better than we have," the company's chief executive Dave West told analysts earlier this year, commenting in particular on the trend towards more luxurious, European-style dark chocolate, which Hershey has been slow to tap into. Shares in Hershey rose nine per cent on Tuesday following speculation by some US-based analysts that the company's only real chance of survival was to hook up with another firm. As well as the confectionery specialists, analysts mooted packaged food giant Kraft as a possible takeover partner for Hershey. But Hershey already has partnerships with both Nestlé and Cadbury - it produces a range of their brands under licence for the US market - and has been linked with them before. Back in 2002, the two European firms launched a joint US$105m bid for Hershey following the announcement by the Hershey Trust, the charitable foundation which owns the majority of shares in the chocolate maker, that it wanted to reduce its stake to invest in a school. The bid was met with outrage in the local community - the vast majority of workers in the town of Hershey, Pennsylvania, are employed by the company - prompting the Trust to back down, but a new deal, leaving the Trust in control of the company at the same time as allowing a new investor to take a minority stake, is being rumoured. Hershey always refuses to comment on speculation about takeover bids, and for West and his management team, it remains business as usual. "2008 will be an investment year - in brands, people and processes," he said, highlighting new business ventures in China and India, as well as the launch of two new premium brands, Hershey's Bliss and a Starbucks co-branded line, which he said would give the company a strong foothold in key growth markets. With Cadbury now focused more on its confectionery business following the spin-off of its US drinks business, and both it and Nestlé conscious of the threat to their operations posed by Mars/Wrigley, the time may now indeed be right for a deal with Hershey.


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