Mondelez reportedly considering buying Hershey. Ozempic and other factors could help justify a sell, according to the analyst.

By Bill Peters

Hershey “now faces long-term challenges related to the expansion of GLP-1 drugs and increased surveillance of unhealthy foods in the United States,” says TD Cowen.

Shares of chocolate maker Hershey Co. were on track for their biggest percentage gain since 2016 on Monday after Bloomberg reported that Oreo maker Mondelez International Inc. was exploring a possible acquisition, as stock trends consumption continues to move towards well-being and weight loss.

And as investors processed the news, one analyst also said a possible tie-up between the two snacking giants made more sense today than in 2016, when a similar attempt failed.

TD Cowen analysts, led by Robert Moskow, said in a research note Monday that Hershey (HSY) faces more challenges today than in years past and that a deal would help Mondelez (MDLZ) better compete with Mars, who wants to buy Kellanova. (K), formerly known as Kellogg.

Hershey, Moskow said, “now faces long-term headwinds from the expansion of GLP-1 drugs and increased scrutiny of unhealthy foods in the United States.” GLP-1 drugs like Novo Nordisk’s (DK:NOVO.B) Wegovy and Ozempic have been used for weight loss and diabetes treatment.

“The company also faces cyclical challenges related to rising cocoa costs, company layoffs and market share losses,” Moskow continued. “The combination of these factors must certainly give them pause.”

A deal would give Mondelez two major snack brands — Hershey and Reese’s — he said, adding that Mondelez, unlike Hershey, had the distribution capacity to expand those brands internationally. He also said the combined company would be better able to avoid rising cocoa costs, which cannot be done with price increases alone.

Hershey shares rose 13.2% on Monday. This advance gave the stock its largest percentage increase since June 30, 2016, when it rose 16.83%. Year to date, Hershey shares are up 6%.

Hershey and Mondelez did not immediately respond to requests for comment on the Bloomberg report. That report said Mondelez had made a “preliminary approach” regarding a potential deal and noted that it abandoned negotiations for a tie-up with Hershey in 2016 after Hershey soured on the offer.

Analysts at TD Cowen said that, assuming the reports are accurate, this would be the third time Hershey has been an acquisition target in the past 22 years. An acquisition would require approval from Hershey Trust Co., which last year held nearly 80% of the chocolate maker’s voting rights.

After more than two years of high food prices, shoppers are looking for cheaper alternatives. Some consumer advocates have said prices for snacks and other foods would be higher if industry merger deals — like the one between supermarket chains Kroger Co. (KR) and Albertsons Cos. (ACI), as well as the planned agreement between Mars and Kellanova – go through.

JPMorgan analysts said cocoa prices have surged this year due to weather that decimated crops in West Africa, climate change, disease and “chronic underinvestment in cocoa farms.” “. Financial speculation has also driven up prices.

During Mondelez’s quarterly earnings conference call in October, management said most of its business was not in chocolate and that the company expected the spike in cocoa prices to be reflected in the first half of next year. He said crop yields could rebound next year.

However, analysts at TD Cowen said in a separate note Monday that futures were still up 30% since October due to concerns about the impact of harsher weather on crop yields. Mondelez, they noted, said it was prepared to raise prices if supplies remained tight.

-Bill Peters

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  12-09-24 1545ET
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