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  1. Based on your valuation of HFC, do you believe the company was fairly valued by the market

before the announcement of the sale? Calculate the WACC for HFC using the data provided in the exhibits; assume a Market Risk Premium of 5.5%. Estimate the stand-alone value of HFC using the free-cash-flow projections provided in case Exhibit 10.


  1. Discus the non-price considerations of the offers. Which, if any, bid would you vote to accept for the purchase of Hershey Foods Corporation? Is your decision primarily based on the economics of the bids or the desire to honor the legacy of Milton S. Hershey?


  1. If you decided to reject both bids and not sell HFC, what will you do to achieve the diversification objective? If you decided to accept one of the bids, what (if anything) would you want to communicate to the constituents who opposed the sale?


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Exhibit 10
Hershey
HERSHEY FOODS CORPORATION: BITTER TIMES IN A SWEET PLACE
Forecast Financial Statements of Hershey Foods Corporation as Stand-Alone Entity
(in millions of dollars)
Income Statement
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
Sales
$4,343.9 $4,561.0 $4,789.1 $5,028.5
5 $5,280.0 $5,544.0 $5,821.2 $6,112.2 $6,417.8 $6,738.7
Cost of sales
2,541.2
2,622.6 2,705.8
2,841.1
2,983.2 3,132.3
3,289.0 3,453.4
3,626.1
3,807.4
Selling, general & administrative
1,164.2
1,222.4
1,283.5
1,347.7
1,415.0
1.485.8
1.560.1
1,638.1
1,720.0
1,806.0
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Operating income (EBIT)
638.5
716.1
799.8
839.8
881.8
925.8
972.
1,020.7
1,071.8
1,125.4
Taxes
252.2
282.9
315.9
331.7
348.3
365.7
384.0
403.2
423.4
444.5
Net operating profit after tax (NOPAT)
386.3
433.2
483.9
508.1
533.5
560.1
588.1
617.5
648.4
680.8
Sales growth
5.0%
5.0%
5.0%
5.0%
5.0%
5.0%
5.0%
5.0%
5.0%
5.0%
EBIT/sales
14.7%
15.7%
16.7%
16.7%
16.7%
16.7%
16.7%
16.7%
16.7%
16.7%
Balance Sheet
Total current assets
1,194.6
1,254.3
1,317.0
1,382.9
1,452.0
1,524.6
1,600.8
1,680.9
1,764.9
1,853.2
Goodwill
388.7
388.7
388.7
388.7
388.7
388.7
388.7
388.7
388.7
388.7
Net property, plant, equipment, and other
1,737.5 1,824.4
1,915.6 2,011.4 2,112.0 2,217.6 2,328.5
2,444.9
2,567.1
2,695.5
Non-interest-bearing current liabilities
543.0
570.1
598.6
628.6
660.0
693.0
727.6
764.0
802.2
842.3
Curr. assets/sales
27.5%
27.5%
27.5%
27.5%
27.5%
27.5%
27.5%
27.5%
27.5%
27.5%
NIBCL/sales
12.5%
12.5%
12.5%
12.5%
12.5%
12.5%
12.5%
12.5%
12.5%
12.5%
NPPE, other/sales
40.0%
40.0%
40.0%
40.0%
40.0%
40.0%
40.0%
40.0%
40.0%
40.0%
Source: Case writer estimates.
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EXDIDIt y
HERSHEY FOODS CORPORATION: BITTER TIMES IN A SWEET PLACE
Historical Financial Statements of Hershey Foods Corporation
(in millions of dollars)
Hershey
Income Statement
1996
1997
1998
1909
2000
2001
Sales
3,989.3
$4,302.2
$4,435.6
$3,970.9
$4,221.0
$4,137.2
Cost of sales
2,302.1
2,488.9
2,625.1
2,354.7
2,471.2
2,668.5
Gross profi
1,687.2
1,813.3
1,810.6
1,616.
1,749.
1,468.
Selling, marketing, and administrative
1,124.1
1,183.1
1,167.8
1,057.8
,127
1,056.1
Operating income
563.1
630.2
642.8
558.4
622.7
412.6
Gain (loss) on sale of business
(35.4)
243.8
Earnings before interest and tax
527.8
630.2
642.8
802.1
622.7
412.6
Interest expense
48.0
76.3
85.7
74.3
76.0
69.1
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Pretax income
479.7
654.0
57.1
727.
46.6
$43.5
Income taxes
206.6
217.7
216.1
267.6
212.1
136.4
Net income
$ 273.2
$ 336.3
$ 341.0 $ 460.3
$ 334.5
$ 207.1
Balance Sheet
1996
1997
1998
1999
2000
2001
Cash and cash equivalents
$ 61.4
$ 54.2
$ 39.0
$ 118.1
32.0
$ 134.1
Accounts receivable trade
294.
360.8
451.3
352.8
379.
361.7
Inventories
75.
505.5
193.2
502.2
605.2
512.1
Other current assets
155.2
114.
150.4
207.0
278.5
159.5
Total current assets
986.2
1,034.8
1,134.0
1,280.0
1,295.3
1,167.5
Property, plant, and equipment, net
1,601.9
1,648.2
1,648.1
1,510.5
1,585.4
1,534.9
Goodwill
566.0
651.
530.
450.2
174
388.7
Other tangible assets
30.7
56.
91.
106.
92.6
156.3
Total assets
$3,184.8
$3,291.2
$3,404.1
$3,346.7
$3,447.8
$3,247.4
Accounts payable
$ 134.2
$ 146.9
$ 156.9
$ 136.6
$ 149.2
$ 133.0
Accrued liabilities
368.1
391.2
311.
364.7
359.
465.5
Short-term debt
315.
257.5
346.0
211.6
258.1
7.9
Total current liabilities
817.3
795.7
814.8
712.8
766 9
606.4
Long-term debt
655.3
1,029.1
879.1
878.2
877.7
877.0
Other long-term liabilities
327.2
346.5
346.8
330.9
327.7
361.0
Deferred income taxes
224.0
267.1
321.1
326.0
300.5
255.8
Total liabilities
2,023.8
2,438.4
2,361.8
2,248.0
2,272.
2,100.2
Stockholders' equity
1,161.0
852.8
1,042.3
1,098.6
1,175.0
1,147.2
Total liabilities and equity
$3,184.8
$3,291.2
$3,404.1
$3,346.7
$3,447.8 $3,247.4
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UVA-F-1409
Exhibit 8
HERSHEY FOODS CORPORATION: BITTER TIMES IN A SWEET PLACE
Hershey
Bidding Companies' Financial Data
Cadbury
Hershey
Wrigley
Nestle
Schweppes
Beta
0.55
0.70
0.70
0.60
Credit rating
Stock price 9/17/2002
A+
N/A
AAA
BBB
73.8
51.9
28.5
Shares outstanding (millions)
49.5
134.2
225.0
0
1,550.6
502.5
Book value of debt ($ millions)
885
19,500
3.543
U.S. Treasuries
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Historical Yield Curve
8/19/2002
9/17/2002
5 year
3.38%
2.90%
10 year
4.28%
3.82%
30 year
5.05%
4.73%
Corporate Bonds'
Hershey
Maturity
Price
Yield
3/15/2012
2/15/2021
117.7
4.69
137.1
5.56
2/15/2027
1 19.4
5.73
Wrigley
No debt
Nestle
Maturity
Price
Yield
6/15/2025
125.4
5.84
Cadbury Schweppes
Maturity
Price
Yield
12/15/2005
100.6
4.31
Cadbury Schweppes bonds in British pounds sterling. All other bonds denominated in U.S. dollars.
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The Bids: Wrigley and Nestle Cadbury Schweppes
By September 14, 2002, the final date by which bids could be submitted, the Hershey
Trust Company board was considering two serious offers: a $12.5 billion bid from the Wm.
Wrigley Jr. Company and a $10.5 billion joint-bid from Nestle S.A. and Cadbury Schweppes
PLC.
Hershey
The Wm. Wrigley Jr. Company
The world's largest maker of chewing gum had been based in Chicago since 1892, when
William Wrigley, while working as a salesman for his family's soap factory, began offering
customers chewing gum. In 1898, he merged his company with one of his suppliers to form the
Wm. Wrigley Jr. Company, and by 1910, the firm's spearmint gum was the leading U.S. brand.
As late as 1961, the company still offered its original five-cent price and product line. But
by 1971, as it faced competitive and economic pressures, the company increased its price to
seven cents and launched several new products, including the following:
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Big Red (1975)
Hubba Bubba (1978)
Orbit, a sugar-free gum (1977)
Extra (1980)
Wrigley continued to expand its business by launching operations in Eastern Europe and
China (1993). In 1999, Bill Wrigley, a member of the fourth generation of Wrigleys to lead the
company, became president and CEO. After 2000, the company focused on testing innovative
gums with such attributes as cough suppression and teeth whitening
In 2002, the Wrigley family owned about 35% of the company and controlled 60% of its
voting shares. With 2001 revenues of $2.4 billion, Wrigley commanded a 50% share of the
global gum market, and sold its products in more than 150 countries. Nearly all its revenues were
derived from gum. Wrigley's Web site described its business strategy as follows:
Wrigley is committed to achieving generational growth and prosperity for our
stakeholders. To achieve this mission, we are executing against a long-term
strategic business plan based on six key objectives. Those objectives include:
. Boosting our core chewing gum business
Expanding business geographically and into new channels
Diversifying our product line in "close to home" areas
. Focusing on innovation in our products, marketing, and business processes
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UVA-F-1409
. Delivering the highest quality at lowest costs
Hershey
. Growing and developing our Wrigley people around the world
The Wm. Wrigley Jr. Company offered $12.5 billion ($7.5 billion in stock and $5.0 billion in
cash) for 100% of the outstanding shares of Hershey Foods Corporation. The Hershey Trust
Company would exchange its Hershey shares for cash and shares in the new company, to be
renamed Wrigley-Hershey. This offer, the equivalent of $89 per share, represented a 42%
premium over Hershey's preannouncement stock price. The deal included commitments to the
Township.
Hershey community, including assurances of job retention at Hershey Foods' plants in Derry
Some analysts speculated that Wrigley management was assuming it could put Hershey
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products into its product mix and sell them internationally. Although it was unlikely that Wrigley
could achieve significant cost savings, management hoped to generate higher sales volumes.
Wrigley had been successful in selling chewing gum internationally and was hoping to do the
same with Hershey's chocolates.
Nestle S.A.
Nestle S.A. was founded in 1843, when Henri Nestle purchased a factory in Vevey,
Switzerland, that made products ranging from nut oils to rum. In 1904, the company began
selling chocolates, and one year later merged with the Anglo-Swiss Company, retaining the
Nestle name. During World War I, the company developed a water-soluble "coffee cube," and
the idea became one of the company's most popular products, Nescafe. Nestle continued to
introduce popular products during the next four decades, including Nestle's Crunch bar (1938),
Quik drink mix (1948), and Taster's Choice instant coffee (1966).
In the 1970s, the company expanded its product line by acquiring a 49% stake in
Gesparal, a holding company that controlled the French cosmetics firm L'Oreal. In the 1980s,
Nestle continued its expansion by acquiring the U.K. chocolate company Rowntree, maker of Kit
Kat (licensed to Hershey Foods Corporation). In the 1990s, Nestle completed several more
acquisitions, including Butterfinger, Baby Ruth candies, Source Perrier water, and Alpo pet food.
Simultaneously, Peter Braceck-Letmathe, named CEO in 1997, divested Nestle's noncore
businesses such as Contadina tomato products and Libby's canned-meat products.
After acquiring Ralston Purina, in 2001, Nestle consolidated its position as the world's
number-one food company. Nestle had become a leader in coffee (Nescafe), bottled water
(Perrier), and pet food (Ralston Purina) and an important player in the cosmetics industry.
Through its stake in Alcon, Inc., Nestle also participated in ophthalmic pharmaceuticals, contact-
lens solutions, and equipment for ocular surgery
Nestle's strategy, according to its Web site, was as follows:
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