Hershey will have to think smaller with Cadbury gone

Hershey's candy boxes are seen inside a store in New York, November 18, 2009.

CHICAGO/PHILADELPHIA (Reuters) - At least Hershey Co tried.

The maker of Hershey Kisses and Reese's peanut butter cups was roused to assemble a counter offer after Kraft Foods launched a hostile bid for Cadbury. Many in the candy business saw it as Hershey's last chance to bust out of the mature U.S. market.

But with the British maker of Dairy Milk and Creme Eggs agreeing to be bought by Chicago-based Velveeta cheese and Ritz cracker maker Kraft, Hershey will have to return to a strategy of expanding internationally through joint ventures and small acquisitions.

"It definitely puts Hershey back to where it was a couple of months ago, focused on its domestic operations," Morningstar analyst Erin Swanson said.

Any attempt to become a global confectioner would have to be done on a piece-meal basis, through smaller acquisitions.

"They would not be able to acquire that whole platform all at once as if they acquired Cadbury," she said.

On Tuesday, Cadbury agreed to be acquired by Kraft after the U.S. food group raised its bid to $19.6 billion (11.9 billion pounds). The deal ended a months-long struggle by Hershey to raise a counter offer for Cadbury without the controlling Hershey Trust giving up its hold on the company.

The trust owns about 80 percent of the voting shares of Hershey Co and requires the approval of Pennsylvania's attorney general before giving up that voting control. Hershey also was hard-pressed to finance a deal to buy a company more than twice its size.

While Hershey has until Monday to decide if it wants to top Kraft's offer, Cadbury's board has already recommended the Kraft deal. A source familiar with the situation said Hershey was unlikely to try and compete at that price.

"They would have been fools not to look at Cadbury. But that doesn't mean they are hurt without it," said a second source familiar with the situation.

"I don't see them doing a massive acquisition. Cadbury was a unique opportunity. It's hard to find another company of that size and scope," said the source.

ANY BOLD MOVES LEFT?

Barring an unexpected turn, Kraft will join Mars Inc at the top of global candy world with about 15 percent of the market each. Hershey, at No. 4 with less than 5 percent of the market, sells Cadbury in the United States under a licensing deal and could eventually lose that to Kraft.

"This might finally force Hershey to think about who they are and who they want to be and act more boldly," said Edward Jones food industry analyst Matt Arnold.

But there might not be any bold moves left in the candy business.

"There are not that many assets on the market that do not have any major barriers to acquisition," said Ildiko Szalai, Food company analyst at Euromonitor International.

No. 3 confectionery player Nestle pulled itself out of any bidding for Cadbury at the same time it agreed to buy Kraft's pizza business earlier this month.

One food industry consultant said that Nestle has considered the idea of selling its confectionery business to further hone its focus as a health and wellness company.

But Szalai said that confectionery still is a significant business for Nestle, known for its chocolate of the same name, and the company is unlikely to sell those operations any time soon.

Some analysts also noted that Nestle thinks very long-term and could eventually look to a joint venture with Hershey or even an acquisition if the Hershey Trust ever decided to sell.

Italy's privately held Ferrero, No. 5 in the market, was considering joining a bid for Cadbury, not selling itself. So, it makes an unlikely target for Hershey to gain international footing.

That could leave smaller players like Perfetti van Melle and Lindt & Sprungli, but Szalai did not see either of those being for sale.

Hershey has been one of the better performing confectionery companies in the recession as its mainstream brands have sold well while premium players like Lindt have struggled.

(Reporting by Brad Dorfman; Additional reporting by David Jones; Editing by Tim Dobbyn)