Food conglomerate Nestle has emerged as the favourite to win a multi-billion auction for American chocolate icon Hershey Foods although investors took a cautious approach to reports a firm offer was already on the table.
Analysts and bankers expect Nestle, the world food and drinks leader, to bid aggressively for the famed maker of Hershey's Kisses in order to cure its weak position in the US confectionery market.
The Swiss company has been pressing forward with negotiations, sources familiar with the process said, despite the several political and legal hurdles, as well as fears the company might not be able to digest such a large deal without hurting its credit rating.
However, Hershey has also been hosting tours and providing financial information for other potential bidders, including Kraft Foods and Cadbury Schweppes, sources said. The talks with all parties remain at an early stage and could fall apart at any time, sources said.
Nestle shares dipped in Monday trading as investors feared it might pay too much for Hershey and have trouble absorbing Hershey after several big deals in the last year.
"People are worried that Nestle is going to overpay and about the opposition to the deal. These are two unknowns that are weighing on the stock," said Bank Leu analyst Steven Frey.
Nestle shares recovered from early lows to SF325.50 in late trading, down 1.5 per cent, under-performing its Swiss blue-chip peers and sector rivals.The fall followed a report in USA Today, citing market sources, that Nestle had bid between $82 and $85 per share for Hershey - a range at the upper end of some analysts' expectations.
Nestle, the maker of Nescafe coffee, Friskies pet food and Kit Kat, which is also made under license in the United States by Hershey, refused to comment on the report, calling it a "market fantasy."
US investors also took a cautious approach to the reported bid. Hershey shares rose $1.72, or 2.3 per cent, to $76.75 in mid-morning trading on the New York Stock Exchange.
A banker close to Nestle said the firm was aggressively pursuing Hershey, which he called a good strategic fit. "They tend to be aggressive bidders for good assets," he said.
However, industry analysts and bankers are also closely watching Kraft Foods. Kraft was not initially considered a favoured bidder for Nabisco Holdings in 2000, but it ultimately won the company for $14.9 billion in a hotly-contested auction.Kraft, which makes Philadelphia cream cheese, Toblerone chocolate and Maxwell House Coffee, also refused to comment.
British confectionery and beverage group Cadbury could also enter the fray, but for now the company appears to be taking a wait-and-see approach, sources said. Cadbury is weighing whether to bid for any brands Hershey's ultimate buyer would have to divest following a sale, or concentrate more on a bid for the Adams confectionery business of Pfizer, which it put up for sale in June, sources said.
"It is clear it can be only Nestle and Kraft that are interested in Hershey," said Rene Weber, analyst with Bank Vontobel. "From the aspect of financial strength, only these two have the chance," Weber said.
The Pennsylvania attorney general on Friday asked a state judge to prevent the trust that controls Hershey from moving ahead with its sale, causing a few trust board members to waver in their support for the sale, some reports said.
"I think a lot of people in Pennsylvania are having second thoughts and I've been shocked by the amount of finger pointing saying this was not my idea," said John McMillin, a food industry analyst at Prudential Securities.
Rumblings in Hershey are the "patriotic defense," Weber said, adding local misgivings that a sale could wreck the company town seemed misplaced because Nestle would probably let Hershey run the US chocolate business if a deal went ahead.
Analysts also suggested fears Nestle could lose its top credit rating were unfounded. Though it has been vacuuming up companies in the rapidly consolidating food sector, analysts believe the cash-rich company can afford Hershey's price tag.
Nestle chief executive Peter Brabeck said that maintaining the AAA rating that allows the company to borrow more cheaply than lower-rated rivals' costs was not the firm's sole aim.
"The price of $82-85 would certainly be justified for Nestle and would not have a big negative impact on earnings before goodwill writeoffs," Weber added. "This price seems realistic."
Nestle said earlier in August it would buy Chef America for $2.6 billion, just months after it said it would take over Dreyer's Grand Ice Cream in a multi-billion franc deal. It bought pet care firm Ralston Purina in 2001 for $10 billion.It is also thought to be interested in Pfizer's Adams unit and Novartis functional food brands.
"If there is a Hershey deal, there could be (credit) downgrades. People might think Nestle has been a bit too acquisitive and will have integration problems," said Zuercher Kantonalbank market strategist Claude Zehnder.
There were also possible antitrust issues as a combined Nestle-Hershey operation would control more than 50 per cent of the US chocolate confectionery market.