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Wrigley (WWY)
Wrigley and Mars - Too Much Sugar?
As far as mergers and buyouts go, this is a pretty big one. In what will go down as the largest deal in the food industry, two iconic US candy brands are joining forces. The news broke late last night and was confirmed early this morning. Privately-held Mars Inc. is buying Wm. Wrigley Jr., which makes the Wrigley chewing gum that you might have heard of, among other things, for $23 billion or $80 a share. That is a massive premium of 28% to Wrigley's stock price as of last week. So while it's still hard for private equity firms to raise money for deals, strategic buyers are clearly having an easier time raising cash. Goldman Sachs (GS: Charts, News, Offers) and Berkshire Hathaway (BRK.B: Charts, News, Offers) are among the entities backing this deal. What does this deal for Wrigley and Mars means and are more such alliances around the corner?
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Nobody saw this deal coming. In fact, it is almost shocking to hear that someone is pulling off a $23 billion transaction is this credit environment which admittedly is better off than a couple of months ago but is nowhere close to being normal. For Wrigley shareholders, this is an extremely attractive offer which is why the deal should close without any major hitches. Wrigley's stock ended last week at $62.48 and now Mars is offering $80 a share - all cash, which is $23 billion in total. $11 billion of that is coming from Mars, Goldman Sachs is lending $5.7 billion and Warren Buffett is lending another $4.4 billion. After the deal closes, Buffett will also assume a $2.1 billion stake in Wrigley (which will function as a standalone subsidiary of Mars). He is receiving his stake at a discount to the $80 a share that Mars is paying to Wrigley shareholders.
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This deal does make sense on some levels. Mars and Wrigley are both huge players in the confectionary business. The former is known for its chocolate brands (e.g. Snickers, Milky Way, Dove etc.) while the latter is huge in the market for chewing gums and mints. So the amount of overlap in their businesses is limited allowing the combined company to broaden its scope and compete on a variety of fronts. Is Mars paying too much? While that remains to be seen, it is always hard to justify such a hefty premium. It also depends on your perspective on Wrigley. Do you see Wrigley as a timeless, American icon operating in a business that is not likely to go out of style anytime soon (after all, who doesn't need some gum?) with a brand name that is worth billions by itself or do you see Wrigley as a company where the hype is greater than the product and which operates in a staid, slow growing, unexciting industry? Wrigley may be an American icon but over 70% of its sales come from outside the US. Warren Buffet, for one, believes in the former description or he definitely would not have been involved in the deal, especially given the fact that he is not getting complete control of Wrigley, an oddity considering the kind of transactions that he likes.
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Wrigley shareholders are yet to vote on the deal, of course, but it is very hard to see them turning it down. Since a large block of shares are held by the Wrigley family, emotional ties to the company is one stumbling block to a smooth sale. Plus, there also has to be skepticism over whether Mars will stick to its promise of letting the current Wrigley management continue running Wrigley as a largely independent subsidiary. But these two factors can't override the 30% premium. A by-product of this deal will be more deals. Anytime a company of such size is created (Mars' annual sales are around $22 billion and Wrigley's are about $5 billion), the other players in the industry (in this case, Nestle, Cadbury (CSG: Charts, News, Offers) and Hershey (HSY: Charts, News, Offers)) are forced to consider their strategic options in order to match up in size and scale.
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