And it’s more tortuous than ever. We first noticed the trend towards the end of last year - a tendency for research analysts to play at being corporate financiers, making up stories as to who might bid for what, when, why and how.
The game became serious when even some of the more outlandish M&A ideas started to come true - but waned over the summer, of course, when the LBO boom got crunched.
Make way now, though, for Terry Bivens of Bear Stearns. The New York-based analyst has just published a note, entitled Deal or No Deal?, explaining how Hershey could yet acquire Cadbury-Schweppes’s confectionery business.
This is in the face of an announcement from Cadbury two weeks ago that it has abandoned hopes of selling the division outright and will now pursue a demerger - and separate NY listing - instead.
For some time now, the sticking point in any putative plan to put Cabury’s chocolate together with Hershey’s candy has been the Milton Hershey Trust - the trust, founded in 1905, that controls Hershey and whose chairman, LeRoy Zimmerman, doesn’t want see its holding diluted.
Step forward Bivens of Bear with an idea - a “Reverse Triangular Merger.”
And before anyone skips off to Investopedia to learn what this might be, Bivens explains that Hershey would pay for “a post-spin Cadbury by issuing non- or low-voting shares.” Consider this:
1. Hershey would create a “disregarded entity,” a subsidiary that for federal tax purposes is considered separate from the owner.
2. The subsidiary would merge with Cadbury’s post-spin confectionery unit, with only the subsidiary
surviving.
3. Hershey would issue non- or low-voting shares.
4. Hershey would exchange these new shares for shares of the subsidiary.
5. Hershey thus would own the assets of the former Cadbury.
Bivens’ cunning scheme would see Hershey generating $21.5bn of financing in this way. And how much new non-voting stock would flood onto the market?
It is difficult to say, because the price of the new shares is unknown; however, historically the market has valued non-voting shares at a 5.44% discount to voting shares. Thus, assuming that the HSY voting shares stayed around their current level, the non-voting shares might sell for around $39.45. Dividing $21.5B by $39.45 yields a figure of 545MM, which is approximately how many shares Hershey would need to issue.
But let’s not get carried away. Even Bivens is doubtful on all this:
To be clear, barring an unexpectedly poor operating performance under new CEO Dave West, we believe the probability of such a combination is quite low, especially considering how massively dilutive it might be (see our analysis below). And given the tone of the Trust’s recent statement, we believe the organization is committed to retaining voting control. So the probability of a takeover of Hershey by, say, Cadbury or Wrigley, may be extremely limited.
