Who says the capital markets are dead? All they needed was the right deal to get moving again, with a helpful nudge from Berkshire Hathaway's (NYSE: BRK-A) (NYSE: BRK-B) investment demigod, Warren Buffett. Even the credit crunch can't keep a good deal down, and I think the deal between Wrigley (NYSE: WWY) and Mars is a sweet one for everyone involved. I also think that there's one very big loser on the sidelines, with no partner to receive its overabundance of kisses.
Why now?
Wrigley has been fiercely independent for years, and Mars has been fiercely private for just as long. So what's behind Mars' $23 billion takeover of Wrigley? According to Wrigley's press release, at least part of the motivation was that Wrigley has grown weary of life as a public company. In an email to employees, Executive Chairman Bill Wrigley Jr. wrote that the transaction "frees us from some of the costs -- as well as the constraints and short-term results pressure -- that come with being a public company."
Should individual investors worry?
Wrigley's comments may have soothed jittery employees, but it has to be disconcerting for investors to see a large and venerable company saying it's fed up with the rigmarole of being a publicly traded U.S. company. Those of us lacking access to billions of dollars in capital should hope that this isn't the start of a trend that will make it difficult for individuals to invest in companies with businesses as solid as Wrigley.
After all, if a company generates enough cash to fund expansion internally and has a solid and defensible long-term business strategy, why would it want to be questioned about the intricacies of quarterly depreciation expenses by a bunch of finance wonks four times a year? Could it be the enticing prospect of being slapped with shareholder lawsuits?
The price
There's no way to view this deal that makes Wrigley look cheap. The transaction price is more than four times Wrigley's 2007 revenue and 35 times 2007 earnings per share. Wrigley was able to fetch such favorable terms in part because it's bargaining from a position of strength. The company delivered great financial results yesterday, for example.
Wrigley also wields a venerated stable of brands and is the worldwide leader in the profitable but niche-filled world of chewing gum. Distribution and marketing synergies with a larger, international confectionary company are obvious, since sales outlets for Mars products throughout the world are also likely to be markets for Wrigley products. Wrigley was doing just fine on its own, thank you, but the 30% premium to the previous stock price is surely enough to compensate investors for missing out on Wrigley's bright future.
The winners: Wrigley, Mars, Berkshire Hathaway, Cadbury
Mars is paying a lot for Wrigley, but it's making the right strategic move. This is one merger in which the whole is greater than the sum of its parts. Penetrating foreign markets with increased confection scale is a significant advantage as these companies become truly global.
Berkshire has masterfully positioned itself with both a debt and equity stake -- the equity bought at a discount to the price paid to Wrigley shareholders -- in what will become the leading international confectionary company.
Cadbury (NYSE: CSG) is a winner, too, because its biggest rival bidder for Hershey (NYSE: HSY) has probably been permanently removed from the equation. The Wrigley-Mars combination may urge Cadbury to sweeten the pot of any offer it makes for Hershey, but the offer would be more than offset by Wrigley's absence as a bidder. And that leads me to the losers.
The losers: Hershey, orphans
Wrigley came close to purchasing Hershey in 2002. Rumors of a sale resurfaced in 2005 and into 2006. Since then, Hershey's performance has been bitter. It remains stuck predominantly in a low-growth American market and has few means of growing international sales without a strong partner.
Now one of the companies that has aggressively pursued Hershey in the past is probably out of the running forever; any combination of Hershey and Mars would face almost certain rejection on antitrust grounds.
To make matters worse, Hershey must also compete against this new behemoth both domestically and abroad. What's more, the Hershey Trust, which is hard to dislike because it benefits disadvantaged children, is a textbook example of a blundering protectionism that threatens to destroy the very thing it aimed to save.
Don't worry, Wrigley stockholders. Be happy!
Wrigley shareholders should be happy with the price the board secured. It wouldn't be surprising to see this deal spur consolidation in the global confectionary market, but the Hershey Trust has proved unpredictable in the past.
Buffett fans will no doubt rejoice that Uncle Warren got a chance to wet his beak in the deal, and everyone can look forward to Berkshire's annual meeting this year, when we'll see whether the Oracle can drink Cherry Coke, eat See's Candies, and chew gum all at the same time.
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