The news announced last week that Vevey, Switzerland-based Nestle S.A. is undertaking a strategic review of its $925 million U.S. confectionery business has placed potential consolidation for the category front and center.

Nestle’s U.S. confectionery unit features such brands as Butterfinger, Baby Ruth, Skinny Cow, Raisinets and others.

In 2016, Nestle ranked fifth in U.S. confectionery market share with 4.5% of the market, according to data from Nielsen for the 52 weeks ended Oct. 8, 2016. Category leaders included The Hershey Co. (31%), Mars Inc. (29.1%), Mondelez International (5.3%) and Lindt/Ghirardelli (5.3%).

In a June 19 research report, Robert Moskow of Credit Suisse explored the value Nestle might have for each of the ranking category leaders, noting that Nestle’s decision to sell “represents a compelling opportunity for U.S. candy companies to consolidate the category at a critical moment.”

Robert Moskow, analyst with Credit Suisse

“Consumers have cut back on sugar-based snacks and shifted more of their shopping on-line,” Mr. Moskow said. “Struggling brick-and-mortar customers have begun to push their vendors to provide deeper promotional discounts to compete. The Nestle brands would provide the buyer with significant synergies and scale to help fund those discounts. But many of the brands are of dubious quality, and the portfolio as a whole is declining at a disturbing rate of 3% per year.”

While smaller companies such as Mars, Simply Good Foods and Ferrero might see an acquisition of Nestle as a way to expand scale, Mr. Moskow said he believes Mondelez is most likely to express a stronger interest than its competitors for the assets.

Mondelezs launch of Oreo chocolate bars points to the companys desire to expand its participation in the U.S. confectionery category.

“As expressed in its unsuccessful bid last year for Hershey and its launch of Oreo chocolate bars, Mondelez has a strong desire to expand its participation in the U.S. confectionery category in a major way,” Mr. Moskow said. “Buying Nestle candy would double its market share to 10% and provide stronger sales and manufacturing muscle for its new Oreo chocolate bar and its heritage candy brands. Mondelez might even make good use of the international license for Nestle’s Crunch brand that comes with the deal.”

But Mr. Moskow also cautioned that a potential Nestle candy transaction poses several areas of concern for Mondelez. Potential roadblocks include whether the transaction would compromise Mondelez’s ability to eventually buy Hershey at a later date, whether investors would get excited about combining two declining underscaled U.S. candy businesses together, and whether a deal would be a setback in Mondelez’s effort to expand into healthier snacks.

Another potential player in the Nestle U.S. confectionery sweepstakes is The Hershey Co., Hershey, Pa. Mr. Moskow said a potential acquisition by Hershey would generate “enormous cost synergies” of 9% of sales and earnings-per-share accretion of as much as 11%, driven by the opportunity to increase capacity utilization and consolidate selling, purchasing and back-office functions. 

“A transaction with Nestle would raise anti-trust concerns with the F.T.C. (Federal Trade Commission), but perhaps not insurmountable ones,” he said, noting that Hershey’s 45% market share in U.S. chocolate plus Nestle’s 5% would boost the Herfindahl-Hirschman Index in the category by over 400 points to 3,270, well above the 2,500 that is considered “highly concentrated” in anti-trust matters.

Lindt & Sprüngli AG, could boost its standing as the No. 3 player in the U.S. confectionery market with an acquisition of Nestle.

Mr. Moskow said Hershey also may see an acquisition of Nestle appealing in helping the company insulate itself from an unwanted bid from Mondelez or Kraft Heinz Co. But overall, he said, the likelihood of Hershey emerging as the ultimate buyer may be small. 

“We simply don’t think Hershey would want to buy an asset that would dilute its top-line growth rate at such a critical time in its strategic plan to reinvest and reinvigorate its core business,” he said. 

Mars is unlikely to pursue Nestle, Mr. Moskow said.

Lindt & Sprüngli AG, the Switzerland-based maker of Lindt and Ghirardelli chocolates that acquired Russell Stover Inc. in 2014, could boost its standing as the No. 3 player in the U.S. confectionery market with an acquisition of Nestle, but Mr. Moskow said Lindt’s position “is firmly at the premium end, and we don’t see the Nestle portfolio fitting with its strategy at all.” 

“We see little to no chance of them being interested in these assets,” he said. 

Mars, Inc., McLean, Va., also is unlikely to pursue Nestle, he said, noting that Mars’ management “probably has its hands full already integrating its Mars and Wrigley confectionery operations.” Two other privately-owned European confectionery companies that are unlikely to wade into the waters are Perfetti Van Melle, Lainate, Italy, and Ferrero S.p.A., Piedmont, Italy.

A potential off-the-radar acquirer identified by Mr. Moskow may be the newly formed Simply Good Foods Co., which was created earlier this year through the combination of Conyers Park Acquisition Corp. and Atkins Nutritionals Inc.

“We could see a strategic rationale for this holding company scooping up the Nestle brands,” he said. “Former Hershey c.e.o. Dave West is on the board. The Atkins business could use the Nestle assets to expand further into single-serve bars and gain better access to the front-end of the store.”