By Lauren Hirsch
(Reuters) - Hershey Co (HSY.N) said on Thursday it had rejected a $23 billion (17.37 billion pounds) preliminary offer by Mondelez International Inc (MDLZ.O) that would seek to expand the latter's U.S. footprint and create the world's largest confectioner.
The snub underscores the challenges Mondelez faces in wooing Hershey's controlling shareholder, the Hershey Trust, a $12 billion endowment created by the eponymous company's founder a century ago.
"The board of directors of the company unanimously rejected the indication of interest and determined that it provided no basis for further discussion between Mondelez and the company," Hershey said in a statement.
A merger of two of the world's top five candy makers would bring Hershey's strong U.S. business to Mondelez's global footprint. The combined company would leapfrog Mars Inc, which has 13.3 percent of the global market, according to data firm Euromonitor International Ltd.
The combination would give Oreos cookies maker Mondelez control over the production and distribution of its Cadbury brand chocolates in the United States, which Hershey currently holds the license to produce, paying royalties to Mondelez.
It would also give Mondelez the U.S. production and distribution rights for Kit Kat, one of the most popular chocolate brands in the world, which industry sources said would be a significant boost to Mondelez as a result of the deal.
Nestle SA (NESN.S) manufactures Kit Kat worldwide, but Hershey has the rights in the United States, paying Nestle royalties from sales.
The bid pits Deerfield, Illinois-based Mondelez against the Hershey Trust, one of Pennsylvania's wealthiest charities. The trust has about 81 percent of Hershey's voting rights and in 2002 prevented the Hershey, Pennsylvania-based company from being acquired by Wm. Wrigley Jr. Co for $12 billion.
A charity created by Hershey founder Milton Hershey to provide for the Milton Hershey School, a private school for children from low-income families, the trust has been the subject of investigation recently by Pennsylvania's Attorney General over conflicts of interest and mismanagement.
Mondelez has offered $107 per share, half in stock and half in cash. Hershey were halted in afternoon trading, up 15 percent to $111.8, while Mondelez rose 2.3 percent to $43.97.
Tigress Financial Partners LLC analyst Philip Van Deusen said he expected the offer price to increase, given the rise in Hershey's shares.
"I think ($107) is a good starting place," he said.
Hershey received Mondelez's preliminary offer this week and has yet to respond, the source said. Mondelez plans to keep the Hershey name and preserve jobs as well as help the company expand internationally, the person added.
Mondelez and Hershey declined to comment.
Analysts have been skeptical of takeover bids for Hershey in the past.
"The Trust ... is outwardly very committed to keeping the company independent," Bernstein analyst Alexia Howard said in June last year. "So it's pretty much impossible for an activist to get involved or for the company to be bought."
Last year, William Ackman revealed his activist hedge fund Pershing Square had built a stake worth about $5.5 billion in Mondelez International, in what is seen as an attempt to push the company to boost earnings or sell itself.
Ackman joined fellow activist Nelson Peltz as an investor in Mondelez.
(Additional reporting by Chris Prentice in New York and Sruthi Ramakrishnan in Bangalore)