By Lauren Hirsch

(Reuters) - Hershey Co <HSY.N> said on Thursday it had rejected a $23 billion preliminary offer by Mondelez International Inc <MDLZ.O> that would seek to expand the latter's limited U.S. footprint and create the world's largest confectioner.

The snub underscores the challenges Mondelez faces in wooing Hershey's controlling shareholder, the Hershey Trust, a $12 billion charity created by the eponymous company's founder a century ago.

The trust has been roiled by allegations of mishandling one of the country's richest endowments. Hershey shares traded above Mondelez's offer of $107 per share in cash and stock, indicating investors expected a new offer.

A merger of two of the world's top five candy makers would bring Hershey's strong U.S. business to Mondelez's global footprint.

Earlier, a source said that Mondelez had sought to provide assurances to Hershey that it would keep its name and preserve jobs. Mondelez sees little antitrust risk given the limited geographic overlap of the two companies' businesses, the source added.

"The board of directors of the company unanimously rejected the indication of interest and determined that it provided no basis for further discussion between Mondelez and the company," Hershey said in a statement.

Hershey shares rose 16 percent to $113.05, while Mondelez rose 6.2 percent to $45.65.

Mondelez is the second-largest confectionary company globally while Hershey ranks number five, and their merger would put them in the top place at 18 percent of the market, according to market research firm Euromonitor International Ltd. The combined company would leapfrog Mars Inc, which has 13.3 percent of the global market.

A fusion of the two would give Oreos cookies maker Mondelez control over the production and distribution of its Cadbury brand chocolates in the United States, which Hershey currently holds the license to produce, paying royalties to Mondelez.

It would also give Mondelez the U.S. production and distribution rights for Kit Kat, one of the most popular chocolate brands in the world, which industry sources said would be a significant boost to Mondelez as a result of the deal.

Nestle SA <NESN.S> manufactures Kit Kat worldwide, but Hershey has the rights in the United States, paying Nestle royalties from sales.

HERSHEY TRUST

The bid pits Deerfield, Illinois-based Mondelez against the Hershey Trust, one of Pennsylvania's wealthiest charities. The trust has about 81 percent of Hershey's voting rights and in 2002 prevented the Hershey, Pennsylvania-based company from being acquired by Wm. Wrigley Jr. Co for $12 billion.

Pennsylvania's attorney general also sued to block the deal, arguing it would hurt the local community.

A charity created by Hershey founder Milton Hershey to provide for the Milton Hershey School, a private school for children from low-income families, the trust has been the subject of an investigation recently by Pennsylvania's Attorney General over conflicts of interest and mismanagement.

The trust's chief compliance officer was put on leave last month after a leaked memo showed the board had spent nearly $4 million investigating conflicts of interest and insider-trading accusations against board members. A top trust official was also sacked in May and pled guilty to wire fraud.

STARTING POINT

Tigress Financial Partners LLC analyst Philip Van Deusen said he expected the offer price to increase, given the rise in Hershey's shares.

"I think ($107) is a good starting place," he said.

Analysts have been skeptical of takeover bids for Hershey in the past. "The Trust ... is outwardly very committed to keeping the company independent," Bernstein analyst Alexia Howard said in June last year. "So it's pretty much impossible for an activist to get involved or for the company to be bought."

Last year, William Ackman revealed his activist hedge fund Pershing Square had built a stake worth about $5.5 billion in Mondelez, in what was seen as an attempt to push the company to boost earnings or sell itself.

Ackman joined fellow activist Nelson Peltz as an investor in Mondelez.

(Reporting by Lauren Hirsch in New York; Additional reporting by Chris Prentice in New York and Sruthi Ramakrishnan in Bangalore; Editing by Lisa Von Ahn and Alan Crosby)