By Brad Dorfman
CHICAGO (Reuters) - British confectioner Cadbury (CBRY.L) has rebuffed a $16.7 billion takeover from Kraft Foods Inc (KFT.N), but if it is looking for an alternative, it probably should not get sweet on Hershey Co (HSY.N).
For U.S. chocolate maker Hershey, it's a matter of Trust. That is, the investment trust that company founder Milton Hershey created 100 years ago.
Hershey is not likely to merge with Cadbury, in part due to the influence of the Hershey Trust Co, which owns about 80 percent of the voting shares at Hershey. Giving too much stock to Cadbury shareholders in either a buyout by Hershey or a takeover of Hershey by Cadbury would dilute the trust's sake in the company.
"As always, we believe the trust remains staunchly opposed to any takeover," J.P. Morgan analyst Terry Bivens wrote in a research report. "However, the ongoing consolidation of the confection industry ... could shift the trust's position."
Bivens said Hershey could conceivably come up with a cash and stock bid for Cadbury that would still give the trust majority control of the combined company. ID: nN10392764
UNLIKELY BIDDER
The trust was not always opposed to merging.
In 2002, the trust pushed then Hershey Chief Executive Richard Lenny to put Hershey up for sale, though it canceled the auction at the last minute amid pressure from the community of Hershey, Pennsylvania, including alumni of the boarding school Milton Hershey created in 1909.
An overhaul of the trust's board followed, and it has since said repeatedly that it cannot give up control of Hershey.
The Hershey Trust manages the stake in Hershey on behalf of the school. A trust spokesman declined to comment on its current plans, and a spokesman for the company declined to say if Hershey was planning a response to Kraft's bid for Cadbury.
A source familiar with the situation told Reuters on Tuesday that JPMorgan (JPM.N) was advising Hershey on a possible strategy regarding Cadbury.
But Bivens, like other analysts, says Hershey is an unlikely bidder for Cadbury, in part because Kraft would be tough to outbid as its "synergies" in any deal would be far greater than Hershey's, which does not operate in the same parts of the world as Cadbury.
The company also might not have room financially to raise the cash required to buy Cadbury, analysts said.
"Hershey already has a fair amount of debt on their balance sheet," Edward Jones analyst Jack Russo said.
JOINT VENTURE?
Cadbury has so far rebuffed Kraft. But if a deal is eventually cut, analysts expect that Kraft would eventually want to sell Cadbury bars in the United States. Those bars and Carmello chocolates are currently made by Hershey in the United States under a licensing agreement with Cadbury.
That said, many analysts think Hershey will need to do something.
"If there was more competition on their home (U.S.) turf, having a broader international presence would be beneficial," Morningstar analyst Erin Swanson said.
If Kraft buys Cadbury, Kraft and U.S. candy maker Mars Inc would each hold about 15 percent of the global confectionery market, according to Euromonitor International. Nestle (NESN.VX) has about 8 percent and Hershey has less than 5 percent.
Hershey combining with Cadbury would expand the global footprint of both companies. But if Hershey cannot buy Cadbury, a joint venture with another company would make sense, Euromonitor's Lee Linthicum said.
"Everyone today is fixated on global share growth and leveraging global equity," Linthicum said.
Such a venture could be formed between Hershey and a company such as Switzerland's Lindt & Spruengli (LISP.S) or Hershey and Turkey's Yildiz Holding, which owns Ulker Group and bought Godiva's from Campbell Soup Co (CPB.N) in 2008.
While Hershey has made some moves to achieve an international presence including a manufacturing venture in China with Lotte Confectionery Co Ltd (004990.KS), a larger joint venture could be the company's most likely way to get bigger international footprint.
"They're big, but they aren't big enough to eat up one of the other big companies," Linthicum said.
(Additional reporting by David Jones in London; Editing by Steve Orlofsky)
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