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Cadbury eyes Hershey as Mars chews up Wrigley

Mars' bumper $23 billion agreed takeover of Wrigley is set to reignite Cadbury Schweppes' effort to sweet talk Hershey into a merger as the world's confectionery market becomes ever more competitive, analysts said.

The deal between the world's biggest chocolate maker, family owned M&M's maker Mars, and the globe's biggest gum maker, Wm Wrigley Jr Co, will push Cadbury off the world's top spot in confectionery just as the London-based group is planning a demerger of its soft drinks business.

The Mars-Wrigley deal will prompt Cadbury to re-start talks with the US's biggest chocolate maker Hershey Co, and the British group will hope the surprise linkup will push Hershey's controlling trust into talks, analysts added.

“Cadbury will have to look at its options and the most obvious is to re-open talks with Hershey over a merger,” said Investec Securities analyst Martin Deboo.

Cadbury has held talks with Hershey before according to sources close to the situation, but the charitable Hershey Trust which controls 78% of Hershey's votes has maintained so far that it doesn't want to dilute its control.

However, the emergence of a Mars-Wrigley combination with over $27 billion of annual sales is expected to focus the minds of executives at Hershey with annual sales of just $4.9 billion, similar to Wrigley at $5.4 billion, while Cadbury had annual sales twice Hershey's at Ł5.2 billion pounds ($10.3 billion).

Mars' $22 billion annual sales come from confectionery brands such as Snickers, Twix and Starburst but also from its other businesses such as Uncle Ben's rice and Pedigree pet foods.

Analysts said a Cadbury-Hershey deal makes strategic sense as the British maker of Dairy Milk Chocolate, Trident gum and Halls cough drops lacks presence in the US chocolate market, while Hershey lacks the global reach of Cadbury's confectionery.

They add that there would be cost savings from combining Hershey's U.S. chocolate business with Cadbury's US gum operations, but little other cost savings as Hershey has limited international operations and hence little overlap with Cadbury.

Cadbury attempted to buy the maker of Hershey Kisses and Reese's peanut butter cups in 2002 when the Hershey Trust pushed for a sale of Hershey only to pull back later after pressure from community groups at its headquarters in Pennsylvania.

Then, Cadbury combined with Nestle to plan its Hershey bid while Wrigley also mounted a surprise bid. But since then Hershey's problems have mounted with its chief executive leaving unexpectedly last October after a run of poor results while it has warned 2008 earnings are set to fall.

Analyst Jonathan Feeney at Wachovia Capital Markets says the takeover deal puts Wrigley shares on 18 times forecast 2008 earnings compared with Cadbury on 11.5 times implying some upside as Cadbury also has a global gum business like Wrigley.

“We'd buy Cadbury on the news for the implied valuation upside, but stay away from Hershey because it's unclear what implications, if any, this deal has,” he said.

Other analysts pointed out the valuation gap was largely explained by Cadbury's operating margins of 9.8% in 2007 being dwarfed by Wrigley at 17.9% as the US group gained from its focus on gum and its high market shares which it holds in key markets such as the US and Britain.

But if Cadbury can not hammer out a Hershey deal, it might face a bid itself from the likes of Kraft Foods Inc as North America's biggest food group could be interested in expanding its European Suchard chocolate unit, analysts said.

Cadbury is set to demerge next month with its confectionery side Cadbury Plc starting trading in London on May 2, while its North American soft drinks business, Dr Pepper Snapple Group, is set to start trading in New York on May 7.

In the Mars-Wrigley deal, billionaire Warren Buffett through his company Berkshire Hathaway Inc will take a minority stake in the new company's Wrigley subsidiary. (Reuters)