The hurdles to a Hershey-Cadbury tie-up are by now well aired.
Hershey has a smaller market cap than Cadbury, would need to take on crippling amounts of debt to finance a deal, and the Hershey Charitable Trust would be loath to relinquish control in any new company.
Yet the industrial logic of a Cadbury-Hershey merger is compelling; something Todd Stitzer knew when he flew out to Pennsylvania in 2007, and something that he still knows today.
There is one solution that could make a Kraft-repelling Cadbury-Hershey merger possible: a dual listed company structure.
This deal can happen. And to see how, you need to think back to another supposedly un-do-able deal — the 2002 merger of the London-listed P&O Princess Cruises by Carnival Corporation of the US.
FT Alphaville has seen a copy of a letter sent to Mr Stitzer on Thursday morning from the special situations team at brokerage GFI outlining a cunning plan for the two companies to chew on.
Richard Royden, the author of the letter, argues that a Carnival-style dual-listed company structure elegantly resolves many of the problems facing the deal.
The proposed deal would see Hershey make a partial cash offer for 11 per cent, or 154m shares, of Cadbury for $5,137bn in cash – equivalent to ₤19.80 per share – to create a DLC.
This creates a value of 825p per Cadbury share – or a cash consideration of ₤2.23 per share – when the offer is mixed into the remaining equity (based on an initial Cadbury share value of ₤6.02).
The new company – “Cadbury-Hershey DLC” – would then be 55 per cent owned by a UK plc, owned by current Cadbury shareholders, and 45 per cent owned by a company listed on the NYSE controlled by Hershey shareholders.
This structure would keep the amount of debt Hershey would have to issue at a realistic level, and also avoid equity dilution for existing Hershey shareholders – something the Trust would not have allowed.
In turn the Hershey Trust could maintain its control position in the US line of the company, as is its mandate, and take up 45 per cent ownership of the overall DLC.
Existing long term UK-based Cadbury shareholders unable to hold US paper would now be able to maintain their participation of the enlarged company.
Lastly, the structure would present the most acceptable solution to the Cadbury’s saga for cultural and political opinion in the UK and US.
Instead of being absorbed into Kraft’s “low growth conglomerate”, Cadbury-Hershey could remain a “pure confectionery play”. Cadbury lacks a US presence, Hershey is 90 per cent US focused. Hershey has the rights to sell some Cadbury brands in the US already. This is the deal that makes sense.
Food for thought indeed.
Related links:
Kinder Surprise for Kraft? – FT Alphaville
Hershey-Cadbury data points du jour – FT Alphaville