MW Mondelez is reportedly exploring buying Hershey. Ozempic and other factors could help justify a sale, analyst says.

By Bill Peters

Hershey 'now faces long-term headwinds from the expansion of GLP-1 drugs and heightened scrutiny on unhealthy food in the U.S.,' TD Cowen says

Shares of chocolate maker Hershey Co. on Monday were on track for their biggest percentage gain since 2016, after Bloomberg reported that Oreo maker Mondelez International Inc. was exploring a possible acquisition, as consumer trends continue to shift toward wellness and weight loss.

And as investors processed that news, an analyst also said a potential tie-up between the two snacking giants makes more sense today than it did in 2016, when a similar attempt failed.

TD Cowen analysts led by Robert Moskow, in a research note on Monday, said that Hershey $(HSY)$ faced more challenges today than in years past, and that a deal would help Mondelez $(MDLZ)$ better compete with Mars, which 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 heightened scrutiny on unhealthy food in the U.S." GLP-1 drugs like Novo Nordisk's (DK:NOVO.B) Wegovy and Ozempic have been used for weight loss and diabetes treatment.

"The company is also facing cyclical challenges from rising cocoa costs, corporate layoffs, and market share losses," Moskow continued. "The combination of these factors certainly must give them pause."

A deal would give Mondelez two massive 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 stave off rising cocoa costs, which can't be done with price increases alone.

Shares of Hershey were up 13.2% on Monday. The advance put the stock on pace for its biggest percent increase since June 30, 2016, when it rose 16.83%. So far this year, Hershey's stock is up 6%.

Hershey and Mondelez did not immediately respond to requests for comment on the Bloomberg report. That report said that Mondelez had made a "preliminary approach" about a potential deal and noted that it had abandoned talks for a combination with Hershey in 2016 after Hershey soured on the offer.

The TD Cowen analysts said that, assuming the reports were accurate, it would mark the third time Hershey had been an acquisition target in the past 22 years. An acquisition would require clearance from the Hershey Trust Co., which as of last year held nearly 80% of the voting power at the chocolate maker.

After more than two years of elevated food prices, shoppers are seeking cheaper alternatives. Some consumer advocates have said that prices for snacks and other foods will be higher if industry merger deals - such as one between supermarket chains Kroger Co. $(KR)$ and Albertsons Cos. $(ACI)$, along with the planned deal between Mars and Kellanova - go through.

JPMorgan analysts said cocoa prices have jumped this year due to weather that has decimated crops in West Africa, climate change, disease and "chronic underinvestment in cocoa farms." Financial speculation has also caused prices to rise.

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

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

-Bill Peters

This content was created by MarketWatch, which is operated by Dow Jones & Co. MarketWatch is published independently from Dow Jones Newswires and The Wall Street Journal.

(END) Dow Jones Newswires

December 09, 2024 15:45 ET (20:45 GMT)

Copyright (c) 2024 Dow Jones & Company, Inc.