U.S. chocolate maker Hershey Co is considering launching a bid of at least $17 billion for British chocolatier Cadbury Plc as it seeks to trump a hostile offer by Kraft Foods Inc, a source familiar with the matter said on Friday.
Hershey has lined up deal funding from Bank of America and JP Morgan Chase & Co to make a solo offer for Cadbury, but is also still weighing a joint bid with Italy's Ferrero Spa, the source said.
The interest from Hershey could add new pressure on Kraft to sweeten its $16.5 billion offer, which Cadbury rejected last week as derisory.
It's still very fluid and there are multiple prongs to this, the source told Reuters on condition of anonymity. It's still very early. But they need at least $17 billion to top Kraft.
Citing people familiar with the matter, the Wall Street Journal reported on Friday afternoon that the impetus for the Hershey bid comes from the charitable trust controlling the company.
The trust is pushing Hershey Chief Executive David West to compete with Kraft's offer, but wants to structure a deal so that it remains in charge of Hershey, the report said.
Officials for the Hershey Trust were not immediately available for comment. Hershey, Kraft and Cadbury declined to comment.
A solo Hershey bid would be the most transformative move the company has made in its 100-year history. The company's market capitalization stands at $8.3 billion, while Cadbury is valued at $18.1 billion.
Given that they generate 85 percent of their sales form the domestic market, gaining access to Cadbury's platform would be highly advantageous, said Erin Swanson, analyst at Morningstar, noting Cadbury's presence in emerging markets.
She added that Hershey would be able to expand its candy and gum business. But a deal would mainly aim to capture new growth as there is little overlap between the companies' businesses and therefore slim opportunity for cost savings.
A RISK-AVERSE TRUST
Hershey's offer could include at least $10 billion in cash from Hershey and $2 billion in new Hershey shares, plus $3 billion to $5 billion from outside investors in exchange for equity in Hershey, according to the Journal.
That would trump the $6.74 billion in cash indicated in Kraft's cash and stock offer for Cadbury, though Kraft has secured $9.2 billion in financing and could raise the cash component of its offer.
But one source familiar with the situation questioned whether Hershey was getting ahead of itself.
Buying a company more than twice its size could be a risk and the Trust has previously shied away from risk, given its mandate, the source said.
A key figure in any Hershey bid is Byron Trott, a favorite banker to legendary investor Warren Buffett, whose Berkshire Hathaway is the largest investor in Kraft. The Kraft connection goes further, as West is formerly an executive of the world's No. 2 food maker.
Hershey, which tried and failed to combine with Cadbury in 2007, is also being advised by Jamie Grant, brother to actor Hugh Grant, as well as Watch Hill Partners, a boutique firm acquired by FBR Capital Markets earlier this year.
Earlier this week, Hershey disclosed it was considering a bid for Cadbury and sources familiar with the matter said it was also discussing a potential joint offer with Ferrero.
A source familiar with the situation told Reuters that the two companies have weighed breaking the UK confectioner up into separate businesses as part of a friendly, all-cash bid.
But both Ferrero and Hershey have interest in Cadbury's chocolate business, while Cadbury may not be keen on a friendly bid if it calls for a break-up of the company.
(Editing by Michele Gershberg and Richard Chang)
($1 = 0.6722 euro = 0.6002 pound)