Hershey Trust Stock Sale This week’s case study looks to evaluate whether or not Hershey’s Trust Company should sell its majority of holdings in the Hershey Food Company and exploring options to diversify their stock position. The assumption made through the reading is that the trust company wants diversify the holdings as a single stock could potentially be detrimental to the overall health of the stock portfolio (Bruner, Kenneth Eades, & Schill, 2014). Due to the structure of the organization, Hershey Trust’s board was put in an interesting position to balance both and economic decision and morality. On one hand, the duty of the trust was to be fiscally responsible and provide fair stock returns to the Hershey Food Company shareholders. On the other hand, they needed to balance whether or not that fiscal responsibility was in the interest of the guidance set forward by Milton Hershey.
History of Milton Hershey In order to evaluate the question of governance, one must understand the overall story of the Hershey company. Hershey Trust Company was incorporated on April 28, 1905, by Milton S. Hershey, Harry Lebkicher and John E. Snyder (Bruner et al., 2014). The company is majority owner of The Hershey Company and sole private owner of Hershey Entertainment and Resorts Company and administrator of Milton Hershey School. Upon the death of Milton Hershey, the trust company was given the gift of $60M in order to continue to the support of the Milton Hershey School. In 1918, Hershey transferred the majority of his assets, including control of the company, to the Milton Hershey School Trust fund, to benefit the Industrial School.
The trust fund has a majority of voting shares in The Hershey Company, allowing it to keep control of the company. In 1951, the school was renamed the Milton Hershey School. The Milton Hershey School Trust also has 100% control of Hershey Entertainment and Resorts Company, which owns the Hotel Hershey and Hersheypark, among other properties. The trustees of the Hershey Trust Company were put in the position by Milton Hershey to the support the Hershey School and in 2001, the endowment was valued at $5.4B. The objective of this case study is to determine if it is in the interest of Hershey Foods Company to explore the potential purchasers of all of the stock held in the trust (Bruner et al., 2014).
Stock Sale and Purchase When Hershey Trust Company sought bid submissions for the stock purchase from Hershey Company, they received two serious bids. These bids were received from Wrigley Company and from Nestley and Cadbury Schweppes (Bruner et al., 2014). Both bids were reasonable in nature but were arranged very differently from each other. On one hand, the Wrigley bid included $7.5 billion dollars in common stock and $5 billion in cash as opposed to $10.5 billion in all cash from Nestle and Cadburry Schewepps company. It is this difference that requires the members of the board to evaluate each purchase order make up closely. It should also be noted that generally speaking, the there is a a hold on selling the newly acquired stocks that can typically run from 90 days to one full year. In order to understand the current and future value of the stock they are trying to sell, it is important to perform financial assessments including the WACC of Hershey as well as calculate the net present value of the previous forecast data from the Hershey Food Company. In Figure 2, shown below, the calculation of WACC is presented. Using a marginal tax rate of 39.5% (assumed in case Exhibit 10), Hershey’s WACC is calculated as:
Figure 1 - Calculation of Hershey WACC

It could be argued that Hershey is carrying too little financial leverage and that the company could reduce its WACC by adding debt to its capital structure.
Figure 2 WACC for Hershey and Potential Bids

The results of the NPV calculations based upon projected financial forecast numbers puts the value of Hershey Foods Company stock at $9.7b over the next 11 years, with a share price equal to $65.80. The calculated value of the stock at $65.80 per share is below both offers that are under consideration, indicating that either sale would provide positive return for the Hershey Trust Company.
Conclusion
At the conclusion of the sale, it should be noted that it is never in the company’s best interest to look only at the numbers. Instead, the organization has to be willing to look at the overall best course of action for the future of the organization and thereby opponents to the sale of the stock by the trust company successfully lobbied against the sale, leaving the Hershey Trust Company fully invested in Hershey Foods.

References
Bruner, R., Kenneth Eades, & Schill, M. (2014). Case Studies in Finance (7th ed.). New York: McGraw-Hill Learning Solutions.