Does $80 Wrigley Equal $50 Hershey? (WWY, JPM, GS, HSY, CSG)

April 28, 2008 by Douglas A. McIntyre

When we saw the Mars acquisition of William Wrigley Jr. Co. (NYSE: WWY) in perhaps the largest food merger, the first thing that came to mind besides "what a premium" was "What does this do for the valuation of Hershey Co. (NYSE: HSY)."  JPMorgan (NYSE: JPM) and Goldman Sachs (NYSE: GS) are providing the lion share of the financing for Mars, and the Oracle of Omaha will provide about $6.5 Billion in financing.  The market cap for Wrigley was $17 Billion before the buyout and about $22 Billion after.

Before this deal, Wrigley was almost 15% off of its 52-week lows, and the buyout premium has this one up almost another 25% higher.  This was approximately 20-times EBITDA and about 32-times 2008 consensus EPS estimates. 

Hershey on the other hand closed Friday at $34.74, only 3.5% ahead of $33.54 low over the last year.  Hershey trades at about 19-times 2008 consensus EPS estimates.  According to Capital IQ, Herhey’s market cap is almost $7.9 Billion before any increase today and it notes that the EBITDA multiple is 9.8 based on the most recent data.  Hershey was also only valued at half of the Wrigley market cap, so in theory financing would be easier to round up.

If all these comparisons are correct on an "on the fly" analysis, you could in theory say that the premiums could be 50% to 100% for Hershey.  The problem is that Hershey has an earnings challenge and its stock was battered harder.  Its raw material costs have escalated in recent years and its dependence on chocolate means its core ingredients are under the whims of some unstable regions in Africa.  This would also not be much of a premium to the all-time highs.  Lastly, it is believed by many that the Hershey family and descendants don’t want to ever give up.

What do these stocks have in common other than stickling their products in your mouth?  Founding families still in charge or in at least a dominant role.  When you have founding families in control or when you have dual classes of stock, about the only mergers that work are friendly mergers where the money for them is just too much to say no to.  They generally want to be included for the future in the new company too for posterity.  The only hostile deals that work in these cases are the hostile deals that turn friendly, still reward the families beyond imagination, and keep them at least somewhat on for posterity.   

After looking over all of this with a quick look, we won’t say that Hershey is all of a sudden worth 50% more than it was Friday.  In fact, it may not be worth significantly more than $40.00. But this Wrigley premium probably just raised the floor on Hershey for the time being.

Shares of Cadbury Schwepps plc (NYSE: CSG) are also indicated higher by 3% in pre-market trading.  Hershey shares are indicated up about 5% pre-market.

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Jon C. Ogg
April 28, 2008

Jon Ogg produces and edits the Special Situation Investing Newsletter; he does not own securities in the companies he covers.