CHICAGO M&M's candy maker Mars Inc has teamed up with billionaire Warren Buffett to buy the No. 1 chewing gum manufacturer Wm Wrigley Jr Co WWY.N for $23 billion, creating the world's largest confectionery company.
The deal, announced on Monday, will give Buffett's Berkshire Hathaway Inc (BRKa.N) a stake of more than 10 percent in Wrigley, which will become a separate Mars subsidiary. Buffett's other food holdings include a stake in Kraft Foods Inc KFT.N.
The deal could force Mars rival Hershey Co (HSY.N) and Britain's Cadbury Schweppes Plc CBRY.L into a deal of their own as they will be faced by a competitor with a stronger geographic base and portfolio of products, analysts said. Cadbury and Hershey are reported to have held talks in the past.
Aside from Berkshire, financing for the Wrigley deal is being provided by Goldman Sachs Group (GS.N) and JPMorgan Chase & Co (JPM.N), Mars said in a press statement.
At $80 a share, the deal represents a 28 percent premium over Wrigley's closing stock price of $62.45 on Friday. Wrigley closed up 23 percent on the New York Stock Exchange on Monday.
While Wrigley said it was not seeking a takeover, the price was likely too high to ignore, Edward Jones analyst Matt Arnold said.
"I have a hard time explaining it any other way, really," Arnold said. "There was no outstanding reason for them to sell it today except for the price."
Wrigley already traded at 23 times estimated 2009 earnings, the second-highest multiple in the Standard & Poor's U.S. packaged foods index .15GSPFOOD.
The combined companies would have a major presence in the global chocolate, gum and candy businesses.
"If you combine these two, really, it creates just a true confectionery powerhouse with global scale and a strong presence in emerging markets," Morningstar analyst Mitch Corwin said.
The acquisition, an unusual move in the confectionery business for Mars, will help the company expand its business into places where Wrigley has been strong, including Eastern Europe, while Wrigley has been making efforts in recent years to expand outside its core chewing gum business, said Irina Kazanchuk, an analyst at Euromonitor International.
While Wrigley is the No. 1 gum maker in the world, it has faced increasing competition from Cadbury's gum business, which includes Dentyne and Trident.
Berkshire Hathaway, meanwhile, gets a stake that can help it expand its overseas exposure.
"Wrigley and Mars have dominant global franchises, and it's consistent with Berkshire's interest in having more exposure abroad, with streams of cash flow from both developing and emerging markets," said Thomas Russo, a partner at Gardner Russo & Gardner, which invests in Berkshire.
Asked if Buffett's funding was needed to make up a shortfall in the financing of the deal, Bill Wrigley said, "There's no question that financial markets are very challenging right now, and coming up with the capital basically to make this deal was a challenge.
Bringing Buffett in was a perfect choice for Mars, a private company, said Kenneth Harris, principal at consulting firm Cannondale Associates.
"Who would you rather have in that?" Harris said. "He understands discretion. He understands privately held things."
PRESSURE ON HERSHEY
Analysts said the Mars/Wrigley deal could push Cadbury, the current No. 1 in the confectionery business, to look again at a tie-up with Hershey.
But the Hershey Trust, which controls about 78 percent of Hershey's voting shares, has said Pennsylvania law requires it to maintain control of Hershey.
"It comes down to control," Arnold said. "Obviously, the Hershey Trust doesn't want to cede it."
Hershey shares were up 4 percent to $36.17 on the NYSE, while Cadbury shares rose 2.75 percent in London.
Wrigley has brands such as Extra and Eclipse, while privately held Mars is known for its M&M's, Snickers, Starburst and Twix.
Combined, Wrigley and Mars controlled 14.4 percent of the global confectionery market in 2006, compared with 10.1 percent for Cadbury, according to the most recent market share data from Euromonitor International.
While publicly traded, a large portion of Wrigley's shares are controlled by the Wrigley family, a Chicago presence whose name is on the Chicago Cubs baseball stadium and a well-known Michigan Avenue landmark building.
The Mars family approached Wrigley with the deal on April 11, said Bill Wrigley, who would be executive chairman of the stand-alone Wrigley unit after the deal closes.
The deal is designed to help build Wrigley's sales, marketing and distribution infrastructure, Bill Wrigley said, adding that Mars' non-chocolate candy brands like Starburst and Skittles would be moved to the Wrigley candy portfolio, which includes Altoids and Life Savers.
The deal is subject to Wrigley shareholder and U.S. government approval and is expected to close within six to 12 months, Bill Wrigley said.
One antitrust attorney said despite the size of the combined company, their products are diverse enough for the deal to be approved.
"If the price of cocoa or chocolate goes up, will people say, 'hell I'll just buy gum?'" said Steven Axinn of Axinn, Veltrop and Harkrider LLP. "I don't see them as good substitutes for one another."
(Additional reporting by Aarthi Sivaraman, Jonathan Stempel and Martinne Geller in New York, Ben Klayman in Chicago, Diane Bartz in Washington and Jessica Hall in Philadelphia; editing by John Wallace, Toni Reinhold)