Let’s be honest. A lot of corporate mergers don’t make sense. But chocolate-maker Mars buying gum-maker Wrigley with all-around-smart-guy Warren Buffett helping to finance the deal? Do I get M&Ms thrown at me if I call that delicious?
On this morning’s conference call, there was a lot talk about the “strong cultural and strategic fit” between Wrigley, a company whose chairman is the great-grandson of its founder, and Mars, another old family firm, one that remains in the closely guarded hands of Forrest Mars Sr.’s heirs. Under the Mars umbrella, Wrigley will get to keep running as a stand-alone company—importantly, still based in Chicago—and will pick up Mars’s non-chocolate sugar brands, including Starburst and Skittles. Mars, a privately held company whose sales of $22 billion far eclipse Wrigley’s $5.4 billion, will get a partner that makes it practically impenetrable at grocery and convenience-store check-outs (that’s a really profitable place to be, BTW), and even more of a force in growing candy markets overseas.
All that is worth $80 a share in cash to Mars—a 28% premium to Friday’s close. That values Wrigley at about 4.12 times 2007 revenues, according to a little math done this morning by Citigroup analyst David Driscoll. Not too shabby for Wrigley considering similar deals have recently gone for 2.5 to 3.0 times trailing 12 month sales.
And what does Buffett get for his $4.4 billion of debt financing and eventual equity stake (of at least 10%) in the Wrigley subsidiary? A company he has ogled for years. Wrigley is right up his alley. In his words, it’s a “business that’s easy to understand, with favorable long-term economics, and able and trustworthy management.” Buffett’s Berkshire Hathaway already owns See’s Candies, which he gushed about in his annual letter to shareholders this year. Add in Mars’s deep pockets and history of investing in its brands for the long-term—ah, private ownership—and who isn’t a winner?
Oh, yeah, Hershey. Really, really should have had a V8 on this one. Wrigley tried to buy you in 2002, silly! More recently, Cadbury has apparently come a courtin’, but, it seems, been rebuffed by the Hershey Trust, which controls 78% of Hershey’s votes and doesn’t want to lose its control. Maybe now Cadbury will make another go of it? Reuters thinks so. It’s candy consolidation time, folks.