Wednesday, December 30, 2009

Hershey may make a solo bid for Cadbury (HSY)

The NYPost is reporting that the Hershey Trust is leaning towards a solo bid for Cadbury, which has been in play for some time now.

Investor worries about Hershey (HSY) jumping into the bidding process may be why shares have significantly underperformed the market in recent months(GSPC=S&P500):

The proposed $16billion takeout price is TWICE Hershey's market value of $8.3billion, and would require a huge additional $10(ish)billion in borrowing to be added to Hershey's currently very management $1.8billion in debt.

The Hershey Trust controls the voting shares of HSY, and they're tasked with funding the Milton Hershey School.  The Trust has been conservative in the past, so this bold (dare I say extremely risky?) move would seem to imperil the school.  The NYPost however, points out that the school's assets of $7billion give it a very comfortable financial position.

I'll tell you one thing -->> it appears that Hershey bondholders do NOT think this deal is going forward, or else the bonds would not be trading at nosebleed prices implying such low risk.  The 2021 notes are trading about 30% above par, to yield over 330basis points less than their coupon.  They will be hit HARD if the company does indeed go forward with a big debt-financed offer for Cadbury.

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