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Hershey and Ferrero compete for Nestle's US candy business

  • Nestle's sale of its U.S. candy business received bids from Hershey, Ferrero, sources tell CNBC
  • Nestle said in June it would explore strategic options, including a possible sale, for its U.S. chocolate and candy business that is said to be valued at $2 billion to $2.5 billion
  • Brands up for sale include Butterfinger, Baby Ruth, Sno-Caps and Laffy Taffy
Nestle Butterfinger and Baby Ruth candy bars are displayed on a shelf at a convenience store on February 18, 2015 in San Francisco, California.
Justin Sullivan | Getty Images
Nestle Butterfinger and Baby Ruth candy bars are displayed on a shelf at a convenience store on February 18, 2015 in San Francisco, California.

Candy giants The Hershey Co and The Ferrero Group both submitted final bids on Friday to acquire Nestle's U.S. confectionery business, sources familiar with the situation tell CNBC. The business, which includes Butterfinger, Baby Ruth, Sno-Caps and Laffy Taffy, is valued at $2 billion to $2.5 billion, the sources added.

The sources noted that Ferrero, best known for its Nutella chocolate spread and Ferrero Rocher bonbons, appears to be the front-runner because it is more willing than Hershey to be aggressive on price.

Still, it may take another week or so to come to a decision, the sources said. Auctions with two companies as front-runners can take longer before a winner is chosen. Private equity firms have also expressed interest, sources said.

Those individuals familiar with the bidding, who cautioned it is possible negotiations could fall through with either party, requested anonymity because the matter is confidential. Ferrero, Hershey and Nestle all declined to comment.

Nestle said in June that it was exploring strategic options, including a possible sale, for its U.S. chocolate and candy business. The business on the block has annual sales of 900 million Swiss francs ($924 million) and, according to IBIS World, 11.5 percent market share.

The bids from the chocolate giants expand upon recent changes in course for both. Hershey until recently focused only on small deals and Ferrero had little U.S. presence.

Hershey, which previously mainly bought small upstart brands, just last month announced its $1.6 billion acquisition of SkinnyPop parent Amplify Snack Brands. The deal stands to be its largest yet and highlights new CEO Michele Buck's focus on scale. Big food companies are often better equipped at managing brands that generate more than $100 million in sales, because smaller names can get lost in the fray.

"Scale is a real enabler to catapult us to success," Buck told CNBC at the time.

The Kisses and Reeses-owner holds 21 percent of the U.S. chocolate market, according to IBIS World.

Italy-based Ferrero, which was founded as a family business in 1946, only recently laid down its stake in the U.S. market. Last year, it paid roughly $1 billion to buy Ferrera Candy Company, the U.S. owner of Red Hots and Now & Later candies. The deal, which followed its acquisition of Fannie May Confections Brands, gave the Italian chocolate giant infrastructure and a platform to grow in the U.S.

US sweet tooth

The U.S. sweets industry has become more challenging amid a heightened focus on sugar and competition from so-called "better for you" snacks like popcorn and snack bars.

Still, snackers haven't given up on indulgences and the largest candy companies, which can afford to invest in on-trend innovation like dark, organic and artificial-free, stand to benefit from the country's continued sweet tooth.

"Candy is too engrained in our culture for it not to be an interesting category for investors," said Nicholas Fereday, executive director of food and consumer trends at investment bank Rabobank.

Scale also gives candy owners cost efficiencies and heft in negotiating with increasingly pressured retail partners. It helps to moderate the seasonality of a business that sees spikes over Halloween.

Nestle has been under pressure to boost returns from U.S. activist shareholder Third Point, which has a $3.5 billion stake in the company. It has also been been focusing on its shift to becoming a health and nutrition company. Last month, it announced its $2.3 billion acquisition of nutritional health product company Atrium Innovations.