With an 85-year-old CEO, Tootsie Roll Industries Inc. (TR) could whet the appetite of an activist shareholder if no clear succession plan emerges.

In 2015, Ellen Gordon became the company's CEO after the death of her 95-year-old husband, Melvin Gordon, the CEO since 1962 and a director since 1952. Ellen, a director since 1969 and president since 1978, holds a 27.98% stake in Tootsie Roll as of March 7, while Melvin's estate holds a 23.45% stake.

The candy and packaged food industries have been consolidating since before Melvin Gordon's death.

Mars Inc. and Berkshire Hathaway Inc. paid $23 billion for Wm. Wrigley Jr. Co. in 2008. Mars bought out Berkshire's 19.3% stake only last year, the same year Mondelez International Inc. (MDLZ) unsuccessfully offered $23 billion for Hershey Co. (HSY) .

Mondelez precursor Kraft Foods Inc. paid £11.5 billion ($15.2 billion) for Cadbury plc. Nutella maker Ferrero International SA announced on Oct. 18 that it would buy Ferrara Candy Co., which generated 2016 revenue of $859 million, from L Catterton. The deal for Ferrara, which has been rolling up major candy companies' unloved brands since 2002, came months after Ferrero acquired the Fannie May and Harry London chocolate brands for $115 million from 1-800-Flowers.com Inc. (FLWS) . Nestlé SA expects to complete the sale of its U.S. confectionery business before the end of the year.

"Worsening fundamentals, rising rates, and increased activism are contributing to an acceleration in M&A activity and cost-cutting," wrote Jefferies LLC analyst Akshay Jagdale, "disproportionately skewed" to the food products industry. An acquisition of Tootsie's somewhat dusty portfolio could provide significant synergies and cost-cutting opportunities for a strategic buyer.

A few privately held small targets remain, like 90-year-old Pez Candy Inc.

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"We've worked hard to keep suitors away," Ellen Gordon told Joël Glenn Brenner in a rare interview for his book, The Emperors of Chocolate: Inside the Secret World of Hershey and Mars. "We want Tootsie to remain independent. Hopefully, our children, or the employees working in the company, will be able to run it someday."

Gamco Asset Management Inc. and Gabelli Funds LLC hold 3.23% and 2.04% stakes, respectively, as of June 30. Gabelli analyst Kevin Dreyer told the Wall Street Journal in 2012 that they expected then that a sale of the company is inevitable.

The Gordons have four daughters, none of whom have publicly indicated that they'll take over the company. A company spokeswoman told the Journal that succession plans are in place at the board level but won't be publicly shared.

Last month, short-seller Spruce Point Capital Management LLC released a 63-page report excoriating Tootsie Roll and its management. Among his criticisms were a lack of candor with shareholders, asbestos problems, poor corporate governance and declining brands and shelf space.

The notoriously secret company has scant contact with investors, with no analyst coverage and no investor conference calls. Spruce Point alleges that that lack of oversight has allowed the company to inflate gross margins by 800 basis points and operating cash flow by $50 million.

Spruce Point also flagged a balance sheet "bloated with excess cash," with capital allocation consisting of a "meager 1% cash dividend" and low capital expenditures. As of June 30, cash, equivalents, and short-term investments totaled $129.7 million.

Chicago-based Tootsie Roll is also overvalued relative to what it could fetch in a sale, Spruce Point claims. "Unfunded pension obligations, significant manufacturing, technology and distribution capex, change of control premiums, and other deal expenses" could add $165 million to $235 million to a potential acquirer's price tag, on top of an "already rich valuation" of 4 times 2018 sales, 19 times 2018 Ebitda and 38 times 2018 earnings per share. In contrast, two "marquee candy and snack companies," Wrigley and Russell Stover Candies Inc., sold for about 3.4 times sales and 17 times Ebitda when they were acquired by Mars Inc. and Lindt & Sprüngli AG, respectively.

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Tootsie Roll's Ebitda multiple of 19.27 dwarfs the sector average and median of 13.58 and 14.39, respectively, according to FactSet data. Competitors also trade at lower multiples, including Mondelez at 15.69, Hershey at 13.09, Mexican bakery company Grupo Bimbo SAB de CV at 9.3 and Nestlé at 16.25.

"Tootsie has declining sales, suboptimal margins, limited international presence, and its products are out of touch with health-focused trends," Spruce Point wrote. "Its shares should trade at a discount to peers," with multiples the firm deems appropriate, yielding downside risk of 25% to 50%.

The U.S. chocolate market is a virtual duopoly, with Hershey and Mars holding a 64% market share, according to Euromonitor data, and no other company controlling more than 4%.

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Editors' pick: Originally published Nov. 3.

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