Mondelez's bid may find gaps in Hershey's armor

Sat Jul 2, 2016 5:10pm EDT
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By Lauren Hirsch and Lisa Baertlein

NEW YORK/LOS ANGELES (Reuters) - An elaborate structure put in place to preserve Hershey Co's (HSY.N: Quote) ties to its local community has been roiled by scandal, creating an opening that Mondelez International Inc (MDLZ.O: Quote) seized on to launch a $23 billion for the chocolate giant.

While Hershey's board of directors unanimously rejected Mondelez's offer on Thursday, its once impenetrable defenses are now looking weaker due to an investigation into the charitable trust that controls it, as well as controversy facing the Pennsylvania Attorney General (AG), who also has a say in any change in Hershey Co's ownership.

The Hershey Trust, set up by the company's eponymous founder a century ago, holds 81 percent of the company’s voting stock and without its approval, a sale is impossible.

The Trust has blocked Hershey deals in the past, including a 2002 takeover bid for the company, which makes Hershey's Kisses and Reese's Peanut Butter Cups.

But the Trust set up over 100 years ago to help underprivileged children is now being investigated by the Pennsylvania AG's office for how much it spends and how long its directors have served for.

The AG's office has called for the resignation of three of its longest tenured employees. Separately, this year, the Trust fired its executive vice president, after he pled guilty to wire fraud associated with campaign contributions.

The Trust is one of Pennsylvania's wealthiest charities. Its shares in the chocolate giant have created a $12 billion endowment that helps to fund a school as well as an amusement park and resort in Hershey, a small town about 100 miles (160 km) west of Philadelphia.

Another hurdle to the Mondelez bid is the Pennsylvania AG's office, which has the right to intervene in a Hershey deal if it deems it "unnecessary for the future economic viability of the company."   Continued...

Hershey's chocolate bars are shown in this photo illustration in Encinitas, California January 29, 2015.  REUTERS/Mike Blake