June 23, 1999

Mars, Inc.
6885 Elm Street
McLean, VA 22101
Phone: 703-821-4900

by Dale Wettlaufer (TMFRalegh)

Ownership: The Mars Family
Competition: Hershey, Nestle, Cadbury plc
A Future IPO? Highly unlikely
Mars, Inc. is a company you almost surely know. The 88-year-old company, wholly owned and managed by the Mars family, manufactures and markets world-famous brands of confections, snack foods, "main meal" foods, pet food and care products, and drinks. It is also an international force in merchant transaction processing and cash management systems.

Its best known product is probably M&Ms, the candy that "melts in your mouth, not in your hand." M&Ms are the world's most popular candy, according to The Emperors of Chocolate: Inside the Secret World of Hershey and Mars, with yearly sales of more than $2 billion. The company's brands form the most powerful lineup of chocolate bar offerings in the world and include Mars Bar, Snickers, Milky Way, Twix, and Three Musketeers. Snickers itself is thought to be the world's best-selling candy bar, though this data is not easily obtained or broadcast by the famously tight-lipped companies in the industry.

Other confectionery and snack food products offered by Mars include Dove Bar, Bounty Bar, Starburst Fruit Chews, Skittles Bite Size Candies, Kudos Granola Snacks, and others.

The company is also the world leader in pet foods, led by its Pedigree dog food and Whiskas and Sheba cat food. Emperors author Joel Glenn Brenner reported 1996 sales in excess of $7.5 billion for this unit. Ralston Purina (NYSE: RAL) reported 1998 pet food sales of $2.6 billion. Nestle S.A. is number two with its Friskies, Alpo, Mighty Dog, and European felix and Fido brands.

The company's numerous other products include Uncle Ben's Rice, Dolmio sauces, Flavia drinks and machines, Ethel M and Revels chocolates, Lockets and Tunes medicated lozenges, and numerous internationally marketed and specialty pet foods.

The Mars Electronics International division (MEI) is larger than people might imagine. Extrapolating from estimates as high as $18 billion for total company sales and taking out the other divisions, this is probably a multibillion dollar company on its own. MEI is "the world's leading manufacturer of electronic coin changers, bill acceptors, and other payment systems. Its products are used to vend confectionery products, canned beverages, fresh coffee, ice cream, snacks, music compact discs, live bait, and other applications in more than 90 countries throughout the world," according to its website.

Not only is the company a leader in world-famous repeat-purchase consumer goods industries, but it's a leader in the manufacturing and servicing of equipment used to vend such goods. In addition, Mars is reportedly very aggressive in the way it services its accounts around the world -- its in-store service by sales agents is quite reminiscent of Frito-Lay, one of the consumer product world's service whirling dervishes. The way it attacks new markets and locks down market share is also quite reminiscent of the Coca-Cola Co. (NYSE: KO). The anecdotal evidence, especially chapter 21 of Emperors, points to Mars being the most driven, intense international competitor in the confectionery industry. That's going up against heavyweights such as Hershey, Nestle, and Cadbury plc.

Mars Inc. is simply a cash machine. According to Brenner, the company's hurdle rate on new investments is an 18% pre-tax return on total assets. That translates into an 11.7% after-tax return on assets. That's on assets marked to market, too. Based on historical costs, return on assets (ROA) would be higher. Let's just say the company has a 2-1 assets/equity leverage profile. Let's also say that 50% of liabilities are working capital liabilities, 10% are equity equivalents, and 40% is debt. That would give the company a 0.40 debt-to-equity ratio and return on equity (and also return on invested capital) of 23.4%. That's not outside the realm of other leading consumer products companies. Cash on cash returns of this magnitude, coming from a company this large, are rare outside of technology-oriented industries.

At the right price, a very strong acquirer would love to own Mars. Inc. If I were the Mars family, I wouldn't wish this company to be public, but I think a lot of other people do.

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