(Bloomberg) -- Holding the key to the sale of America’s second-biggest candy company is a scandal-scarred, $12 billion charity that all but owns Hershey, Pennsylvania.
Hershey Trust Co. controls about 80 percent of Hershey Co., guides the 107-year-old Milton Hershey School, and oversees an amusement park and resort in the town of about 14,000.
Its 10 trustees have been averse to deals, scuttling efforts to separate them from their candy-coated source of cash. The Hershey Co. board rejected Mondelez International Inc.’s $23 billion bid Thursday to put together the biggest candy maker in the world by buying the ailing chocolate company.
What surprised some observers was that Hershey offered no rationale for rebuffing Mondelez, saying only that it saw nothing in the offering that warranted further discussion.
It could be a negotiating ploy, said Chris Growe of Stifel Financial Corp.
“We believe Mondelez will raise its offer to entice the Hershey Trust to engage in negotiations and eventually sell the business,” Growe said Thursday. If that fails, perhaps Hershey will get a bid from Nestle SA, he said.
Nestle and Wm. Wrigley Jr. Co. both made offers to buy the company in 2002 before being rebuffed by Hershey Trust. The trust has also stood between Hershey and a deal with Cadbury, which was ultimately acquired by Kraft Foods. Hershey now owns the Cadbury license in the U.S., while Mondelez sells the candy in the rest of the world. Unifying the brand is considered part of the rationale for the takeover offer that was rejected Thursday. Mondelez declined to comment on the deal. So did Kent Jarrell, a Hershey Trust spokesman.
Four years after establishing the Hershey Trust, chocolate baron Milton Hershey opened the boarding school for low-income students and designated the trust as its administrator. The trust also runs the Hershey Entertainment & Resorts Company, which operates a minor-league hockey team, entertainment venues and Hersheypark. Along with the factory and corporate offices of the chocolate company, they dominate the landscape in Hershey, about 100 miles west of Philadelphia.
U.S. consumers are cutting down on sugar and the candy company is suffering. Its name has been bandied about as a potential takeover target in recent months as the food industry consolidates. But any rumors come tinged with a touch of skepticism, mostly because of the Hershey Trust. Without its approval, a sale has no chance.
Then there’s the little detail that the Pennsylvania attorney general has the right to review a deal to acquire the candy maker. That’s because the trust is legally obligated to continue financing the Milton Hershey School, and since the trust is supported by profits from the chocolate company, the state can try to stop a sale if it determines that school funding is threatened.
The trust has been the subject of allegations in recent years of lavish spending by board members. The state attorney general recently sought the resignation of three board members and asked the trust to reduce board compensation, the Philadelphia Inquirer reported.
Trust executive John Estey, a one-time aide to Pennsylvania Governor Edward Rendell, was fired in April after pleading guilty to wire fraud associated with campaign contributions.
With all the controversy at the trust, Mondelez emerged with a bid to take over Hershey at $107 a share.
“I think Mondelez appreciates that the trust’s board has been weakened, and given how protective of Hershey’s interests the trust has been, now is the time, if ever, to swoop in,” said Asit Sharma, an analyst at the Motley Fool. “We can expect an adjusted offer in the near future, which will be more difficult for the board to reject unanimously as shareholders clearly support the idea of a merger.”