Sponsored Link:

Mars Teams up With Berkshire Hathaway and Warren Buffett in $23 Billion Buyout of Wrigley

By Jennifer Yousfi
Managing Editor

Take two leading candy companies, mix in $23 billion, and add in a pinch of investing guru Warren Buffett and what do you get?

How about one of the largest candy companies on the planet…

Closely held Mars Inc. – with a sweet $4.4 billion in debt financing from Buffett and Berkshire Hathaway Inc. (BRK.A, BRK.B) – will acquire U.S. chewing gum icon Wm. Wrigley Jr. Company (WWY), in a deal valued at $23 billion.

Story continues below…

Sign up right now, and we’ll send you an important new report for free: “The Three Best Investments in Asia.”




"There’s really nothing that can go wrong with something like the Wrigley and Mars brands," Buffett, 77, said during an interview on the CNBC cable TV network yesterday (Monday). "People are eating more and more of their products every day."

Mars will pay $80 per share for Wrigley in an all-cash deal, which represents a 28% premium over Wrigley’s Friday closing price of $62.45. With the bid from Mars, Wrigley shares shot up 23%, gaining $14.46 each yesterday to close at $76.91.

Once the deal closes, Wrigley will become a separate Mars subsidiary.

"It’s a great price," Thomas Burnett, director of research at New York-based Wall Street Access, told Bloomberg News. "Nobody is going to pay more than that. Who is going to go up against Mars and Buffett?"

And there’s possibly a lot more to the deal, sources revealed late last night: By helping Mars buy Wrigley, Buffett may actually be helping himself: As one, big privately held entity, the merged Mars-Wrigley giant would be much easier for Berkshire to buy outright should the secretive family that runs the business ever decide to sell it, sources said.

Whither Hershey?

The Mars-Wrigley merger brings together two all-star confectioners. The Chicago-based Wrigley’s by itself has enough marquee brands to fully stock any candy counter, including the Juicy Fruit, Orbit and Eclipse gums, Life Savers hard candies and Altoids mints. The McLean, Va.-based Mars is vending-machine royalty in its own right, wielding such perennial winners as M&Ms, Twix and Snickers.

Despite their size, both are agile players. Wrigley, for example, is a globally focused innovator, even re-shaping its product portfolio to appeal to regional tastes and cultural customs as it moves into new markets all around the world. Last summer in China, for instance, Wrigley talked about how it combined its traditional products with concepts adapted from traditional Chinese medicine to create such new alternative "flavors" as "beauty" gum, "cooling" gum and "relaxation" gum. Wrigley ended up with a big hit: Despite a sluggish market here at home, such bold moves overseas allowed the company to deliver a 21% jump in profits for that quarter.

The deal could put pressure on Mars rival, The Hershey Co. (HSY), to resume talks about a possible merger with London-based Cadbury Schweppes PLC (CSG). The two candy-making firms have been in sporadic discussions for quite some time over a possible merger, but as yet have been unable to agree on terms.

Candy companies are facing higher raw ingredient costs as the prices of commodities continue to soar. Wrigley’s costs have remained more constant, as the majority of its products do not include dairy, cocoa, or wheat.

In addition to providing the debt financing, Buffett’s Berkshire Hathaway Inc. (BRK.A, BRK.B) will make a minority investment in Wrigley valued at $2.1 billion. It’s believed that Buffett is getting a discount on the Wrigley stake.

A Look Inside Berkshire

Buffett favors companies that have a competitive advantage, offering products or services that can’t easily be replicated by rivals. Businesses like Mars and Wrigley, which have strong consumer brands, fit the bill, Jerome V. Bruni, president of J.V. Bruni and Co., a Colorado Springs, Col.-based investment banking firm, told the Dow Jones Newswires.

This move by Berkshire and Buffett is just the latest in a string of recent deals for the "Oracle of Omaha." Other recent investments include a stake in Kraft Foods Inc. (KFT) and GlaxoSmithKline PLC (GSK), Europe’s largest drugmaker.

Since taking over Berkshire Hathaway in 1965, Buffett has transformed the once-wheezing textile manufacturer into an investment vehicle that controls an amalgamation of more than 70 portfolio companies and that has a market value of $200 billion.

As of the end of last year, Berkshire owned 3.3% of Procter & Gamble Co. (PG), a consumer-products giant, along with big chunks of The Coca-Cola Co. (KO) and Anheuser-Busch Cos. Inc. (BUD).

Buffett already owns a high-quality confectioner – See’s Candies, a specialty West Coast chocolate-and-candy maker that was founded in 1921 and acquired by Buffett in 1972. Sales were $30 million and pretax profit was less than $5 million that year. In 2007, the San Francisco-based See’s earned $82 million on revenue of $383 million.

In his most recent letter to Berkshire shareholders, Buffett attributed such "extraordinary results" down to See’s "durable competitive advantage."

Indeed, See’s is representative of the kind of companies that Buffett likes to own – operations such as the Nebraska Furniture Mart, or Borsheim’s Fine Jewelry, which are highly profitable and display strong growth, yet somehow manage to maintain the "feel" of the old-time sole-proprietorship shops that used to occupy the downtown "Main Street" business district in every small town. See’s Candies is a really solid example of that kind of acquisition: Despite its growth, it still sells its confections from several shops it operates, but also does a huge mail-order business from its catalog, which – unlike most U.S. companies – it continues to offer for free.

Once the Mars buyout of Wrigley is concluded, Buffett will own a piece of the chewing-gum maker.

Goldman Sachs Group Inc. (GS) and JPMorgan Chase & Co. (JPM) will provide financing for the deal. The financing package consists of about $11 billion from Mars, a $5.7 billion senior debt commitment from Goldman, $4.4 billion in subordinated debt from Berkshire, and the $2.1 billion investment from Berkshire – payable at the time the deal closes, Dow Jones and others report.

When it comes to Berkshire, the one question that arises on an ever-more-frequent basis is that of succession – who will succeed the wildly successful Buffett? Berkshire claims to have such a plan in place.

[Editor's Note: Warren Buffett isn't the only guru whose advice has been consistently profitable over the long run. Retired financier and best-selling author Jim Rogers called the China boom more than a decade ago, and more recently predicted the global commodities boom. Read some of Rogers' most recent predictions, and then take a moment to see how you can get a free copy of his brand-new best seller, "A Bull in China." Also here - and free for you to download - is our most recent investment research report detailing Warren Buffett's most recent investment moves.]

News and Related Story Links:

April 29th, 2008

Why Gold Will Surpass $2,500

Few investors realize that inflation is the least of the factors driving the bull market in gold. Other factors, like Venezuela's crackdown on gold exports, are likely to push prices higher. Find out how to play each of the "7 Key Drivers" in our Money Morning Publisher's Series report... Go here to get it for free.




This entry was posted on Tuesday, April 29th, 2008 at 2:01 pm and is filed under Berkshire Hathaway, Top News. You can follow any responses to this entry through the RSS 2.0 feed. Due to the amount of comments we receive Money Morning will not be able to respond to all questions. If you have not already registered to leave a comment, once doing so you will receive Money Morning's Daily Email. Responses are currently closed, but you can trackback from your own site.