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Kiss of death?

Hershey Foods Corp.'s announcement that it would put itself up for sale stunned Hershey, Pa., the quiet, insular town it almost single-handedly created. It also startled a financial community anticipating that this American icon could end up in European hands.

With tears in his eyes, Richard H. Lenny, the company's cost-cutting chief executive whose clashes with workers erupted into a six-week strike this year, gathered employees Thursday morning to break the news and assure them it was not his doing.

Rather, the decision came entirely from the Hershey Trust Co., the philanthropic entity that controls the chocolatemaker and was set up almost 100 years ago by Milton S. Hershey to look after the community's poorest children long after he had gone.

"We were shocked," said Dennis Bomberger, a business agent for the Chocolate Workers local 464, the workers' union. "We always thought the Trust would keep Hershey Foods forever. It's always been a Hershey town."

Even to the cheerleaders of consolidation on Wall Street, putting Hershey on the auction block seemed out of character for a company so tied to the Pennsylvania community that bears its name.

Beyond its kiss-shaped lampposts and streets named Chocolate and Cocoa avenues, the town's schools, houses, gardens and theater all bear the imprint of Hershey's charitable legacy, having been paid for with his profits.

Many presumed that the Trust existed solely to perpetuate Hershey's grand social experiment, lending to an air of disbelief that the Trust could ultimately be the one to unravel one of the nation's last surviving company towns.

"Milton Hershey must be rolling over in his grave," said John McMillin, a Prudential Securities analyst. "He believed very strongly in the community of Hershey, in protecting it. I'm all for food industry consolidation, but this one surprised me."

But the Trust says its sole charge is the preservation of the Milton Hershey School, an institution that opened in 1909 for orphaned white boys and now serves 1,200 students of every race and gender from kindergarten through high school. Its endowment is already $5.4-billion, before the company's sale, eclipsing most major universities.

"Wow, that's a lot of money," said Michael L. Ross, the chief investment officer for Stanford's $8-billion endowment, noting that some of the country's largest endowments are no more than $2-billion. "That is mind-boggling for a K-12."

With the stock market reeling, the Trust described a sale as the surest way of safeguarding its assets in case the company's fortunes ever turned.

"Frankly, we don't know what Milton Hershey might have done," said Robert C. Vowler, the chief executive of the Trust, which owns 76 percent of the company's voting stock. "All we can do is look at what he did in his lifetime. He built companies and sold them. Our responsibility is to perpetuate the school, not the company. That is the fundamental reason we are doing what we are doing."

The announcement comes as a second wave of acquisitions in the food business is beginning to build, even though the industry has been whittled down to a smattering of global players in the last two years.

Taking off at a feverish pace in the closing half of 2000, only to slow precipitously within a year, the consolidation frenzy saw Unilever buy Bestfoods, Philip Morris snatch Nabisco, General Mills swallow Pillsbury, Kellogg take over Keebler and PepsiCo seize Quaker Oats, leaving Hershey as one of the few exceptions to what seemed like an inevitable trend.

Despite the many pairings that have occurred, few expected a name as recognizable as Hershey to have difficulty enticing buyers. An auction could bring in $10-billion or more, analysts estimated, making it one of the largest in the industry.

"Hershey is clearly one of the jewels left in the food industry," said Romitha Mally, a Goldman Sachs analyst.

Suitors likely would include at least one American company, Kraft, but no less than two European contenders, Cadbury Schweppes and Nestle, both of which have heavy stakes in the candy business overseas and a small enough presence in the United States to stand a chance of winning approval from the Federal Trade Commission.

Nestle may have an advantage over rival bidders, the Wall Street Journal reported: It licenses its KitKat brand to Hershey for sale in the United States. Nestle could reclaim control of the brand, a franchise worth as much as $1-billion, if Hershey goes to another buyer.

Rather than simply accepting the highest offer, the Trust said it is looking for a buyer willing to keep the company's headquarters in Hershey, instead of scooping up brands including Payday and Reese's before closing up shop there. In so doing, the Trust said it hoped to keep the town's relationship with the company much as it has been for the past 100 years, more or less.

"The economics of the region could be impacted severely if things do not go the way the Trust would like to see them go," said Skip Memmi, chairman of the Board of Supervisors in the Township of Derry, the official name of the city where Hershey resides. The company employees about 13,000 people in a town of no more than 22,000, Memmi said, making for obvious repercussions if a buyer ultimately decides to look elsewhere for its corporate headquarters. "That could affect everyone's pocket book."

Bristling at the suggestion that it has overlooked its social obligations, the Trust said it was simply acting while it still could. Since the mid-1980s, when Hershey stock represented more than 80 percent of its assets, the trust has been weaning itself off its dependence, trying to become more like other foundations whose financial health does not rise and fall with the fortunes of a single company.

Over the past 16 years, the trust has sold some 41-million Hershey shares, often to the company itself. While the strategy has lessened its vulnerability to sudden swings in the market, it has left it in a somewhat precarious position.

The Trust had every intention of continuing to decrease its ownership in Hershey, now at about 31 percent. But according to a 1984 agreement reached with the company, once the Trust's stake drops below 15 percent, the coveted class B shares it owns, which account for its overwhelming influence, revert back to class A shares, which have only one-tenth the voting power. At that point, the Trust would no longer dictate the company's destiny.

"This has been a long road for us," said Vowler. "Had we kept on the same course as we had been, we would have lost control of the company."

Lenny, the former Nabisco executive who came in as the first outsider to run Hershey in its 108-year history in March 2001, tried desperately to persuade the Trust to sell its shares to the company, but the proposal was rebuffed.

For all the hard feelings that linger from the strike and the stigma of being an outsider that he could never shake off, it was Lenny, not the ironclad trust set up by Hershey himself, who fought to keep the chocolatemaker from falling into a competitor's hands.

But to many of the chocolate workers, spilling out of Hershey's factory in their navy blue jumpsuits, heavy work boots and baseball caps, the internal power struggles matter less than their prospects for the future.

"We talked about it, joked about it, but you just never thought it could actually happen," Boyd Martin, a 42-year Hershey veteran who cooks up batches of chocolate syrup, said as he put his empty lunch box and jacket into his red pickup. "I'm looking to retire in 2004, and it's real possible that this kind of switch-over is going to impact that. I just don't know. I just don't know."

Hershey Foods

Chief Executive: Richard H. Lenny

Headquarters: Hershey, Pa.

Total employees: 14,000

2001 revenue: $4.56-billion

2001 net income: $207.2-million

Top brands

Almond Joy candy bars

Cadbury Creme eggs

Hershey's kisses

Hershey's milk chocolate bars

Jolly Rancher candy

KitKat wafer bar

Milk Duds candy

Reese's peanut butter cups

Twizzlers candy

Whoppers malted milk balls

York peppermint patties

Source: Company reports, New York Times

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