The Cadbury board members have told the Hershey directors that they would support a bid by the Pennsylvania company, and they have provided some guidance on the kind of price that would draw board support, these people said.
In these talks, Hershey has sought direction from Cadbury and disclosed financial terms and the structure [image-nocss] of a possible offer. Hershey has also inquired whether Cadbury would be open to selling certain assets, these people said. In response, Cadbury has provided "reasonable guidance without specifics," one of the people told the newspaper.
"Cadbury wants a friendly deal, a white knight, as an option, so there are ongoing back-channel talks," this person said, adding that Hershey has been "proactive" and initiated many of the conversations.
Cadbury board members and CEO Todd Stitzer have said publicly and privately that they see Hershey as a better fit than Kraft. At the very least, a Hershey bid could push Kraft to raise its own offer.
Conversations between the two sides have been going on for about a month, but they have become "more frequent and more open" in recent weeks, another of the people told the paper.
In December, Hershey's board formed a special committee of outside directors to examine an offer for Cadbury. Those directors do not sit on the separate Milton Hershey School & School Trust board, which has voting control over the publicly traded company. The conversations have gone on among board members, bypassing bankers and advisers to the companies, three of the people familiar with the matter told the paper. The Journal said it could not be determined which specific board members have been involved in the talks.
A public statement Tuesday morning by investor Warren Buffett, Kraft's largest shareholder, that he wouldn't support issuing new Kraft shares has "heartened" Hershey and its advisors, persuading them that the company could make a competitive rival bid, said another person familiar with the matter.
"It gives them conviction they can win, that Kraft now has fewer degrees of freedom than previously thought," this person told the paper.
Another of the people familiar with the matter cautioned that the talks between Cadbury and Hershey are not very detailed, and that Cadbury's primary interest is to remain independent, said the report.
According to U.K. takeover rules, should Cadbury open its books to Hershey as part of such discussions, it would have to do the same for Kraft.
Kraft and Cadbury are not currently in discussions, the person said, and the odds that Cadbury and Kraft will begin talking anytime soon about a friendly deal appear slim.
Though Cadbury officials have argued that Hershey and Cadbury would be a better operational and cultural fit, they stressed that the final decision on any deal will come down to who offers the greatest value, the report said.
"We are not looking for a 'white knight' and remain focused on demonstrating the value and potential of Cadbury as the world's greatest confectioner," Phil Denning, a Cadbury spokesperson, told the Journal. "As we have consistently said, we are focused on delivering value to our shareholders, and unless and until we have a credible offer that adequately reflects the strength of this business, there is nothing to comment upon."
Michael Mitchell, a Kraft spokesperson, told the paper, "Currently, we're the only offer on the table. We're not going to speculate about what others may or may not be doing. We believe we're the best, most logical partner for Cadbury."
Representatives for Hershey and the Hershey Trust declined to comment to the Journal.
Hershey faces some major obstacles if it bids for Cadbury, said the report. As a result of a Pennsylvania law enacted after an aborted $12.5 billion sale of Hershey to the Wm. Wrigley Jr. Co. in 2002, the Hershey Trust must get the state attorney general's approval for any transaction that could threaten the trust's control of Hershey. If the attorney general were to block the sale, the trust would have to "prove by clear and convincing evidence" in court that a sale is necessary.
A bid for Cadbury would also test Hershey financially. With annual sales of about $5.2 billion and a market capitalization of $8.5 billion, Hershey is about half the size of Cadbury, which has a market cap of $17 billion.
Hershey still has not decided whether it will make a bid, the report said. It held a board meeting earlier this week and decided to keep studying the issue, said several of the people familiar with the matter.
In December, Hershey's board formed a special committee of outside directors to examine an offer. Those directors do not sit on the Milton Hershey trust's board. Tom Ridge, a former Pennsylvania governor and secretary of the U.S. Department of Homeland Security; David Shedlarz, a former vice chairman of the pharmaceutical company Pfizer Inc.; and Charles Davis, the chief executive of private-equity firm Stone Point Capital, are on this committee, which is analyzing possible structures of the deal, the report said.
One thing Hershey has considered to fund the deal is a sale of assets, such as the U.S. rights to Kit Kat, the chocolate-covered snack, two of the people told the Journal.
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