08S7C's Economics Blog

A SWEET DEAL =)

Mars will buy Wrigley

AP

IT IS a little over a month since Wrigley, the world’s biggest gum-maker, announced that it would improve the taste of its favourite goods and introduce new flavours and whizzier packaging. The brand’s added allure was quick in making an impression. On Monday April 28th Mars, another American confectionery giant, and Warren Buffett's investment firm, Berkshire Hathaway, agreed to team up to buy Wrigley for some $23 billion. The deal will give rivals in the world’s sweets industry plenty to chew over.

For several years Wrigley, Hershey, Cadbury, Mars, Nestlé, Kraft and other big confectionery firms have been in on-and-off talks in a variety of permutations. Yet among all the big corporate tie-ups under discussion a union of Mars and Wrigley seemed the least likely. Mars is a private company. The Wrigley family controls the gum firm. And both seemed to guard their independence fiercely.

One reason that both parties were keen to do a deal is that the newly minted firm will control a sizeable slice of the world’s confectionery market. Wrigley and Mars, the company behind Snickers, Twix and Mars chocolate bars, will have a share of about 14.4% of the market compared with 10.1% for Cadbury. And like Cadbury the new sweet giant will be strong in gum, chocolate and sugar sweets—the three main types of confectionery.

Mr Buffett and Mars are paying generously for Wrigley. It represents a 28% premium over Wrigley’s current share price. The sugar coating for Bill Wrigley Junior, the great-grandson of the company’s founder, is that he will remain executive chairman. He can keep his management team and Mars, mindful of its close association, will let Wrigley remain based in Chicago. The Wrigley building is a Chicago landmark. Wrigley field is the home stadium to the Chicago Cubs, one of the most popular baseball teams in the country.

Mars (with Mr Buffett’s help) is prepared to stump up such a sum for Wrigley to bring greater strength and diversity to its business. Wrigley operates across the globe, making most of its sales outside America, and has done well in fast-growing markets such as China, India and the Middle East to counteract weaker growth in America. Wrigley has been facing tougher competition in the American gum market from Cadbury since the British firm bought Adams, a rival gum-maker, from Pfizer in 2003.

Cadbury has the most to fear from a bulked up Mars. Next week it becomes a standalone confectionery company when it lists Dr Pepper Snapple Group, its American fizzy-drinks business. Spinning off that business is intended to allow Cadbury’s to sharpen its focus on confectionery. The emergence of a much bigger rival might spur a bid for Kraft's confectionery unit. But it would struggle to find the cash for a large acquisition. Cadbury had wanted to sell its drinks arm to provide it with a bumper war chest, but hopes for a private-equity deal foundered last year as conditions in credit markets deteriorated. It is also under intense pressure from shareholders to lift margins.

Switzerland’s Nestlé has far fatter coffers than Cadbury. Although anti-trust issues would prevent Nestlé from buying Cadbury’s British chocolate business, it might be interested in the group’s fast-growing gum brands. On another front Kraft may be weighing a bid for Cadbury rather than wait for Cadbury to make a move of its own. To spruce up its lacklustre performance Kraft must move into businesses with higher growth such as gum and sugar sweets and into booming emerging economies, where Cadbury derives over one-third of its sales.

After many failed attempts to come to an understanding, Hershey, America's biggest chocolate-maker, and Cadbury could revive their merger talks. The two are a near-perfect fit, but Hershey cannot afford Cadbury, and Cadbury cannot buy Hershey without the approval of the trust that controls the firm. So far the Hershey Trust has stubbornly insisted that it is unwilling to relinquish its 78% controlling interest in the company. One crumb of comfort for Cadbury is that Hershey, faced with a formidable new rival in its home market, might rethink a tie-up.

Merger and acquisitions

There are three sorts of mergers: horizontal integration, when two similar firms tie the knot; vertical integration, in which two firms at different points in the supply chain get together; and diversification, when two companies with nothing in common jump into bed. These can be a voluntary merger of equals, a voluntary takeover of one firm by another; or a hostile takeover—in which the management of one firm tries to buy a majority of shares in another.

Merger activity generally comes in waves, and is most common when shares are overvalued. The late 1990s saw fevered activity. Then the pace slowed in most industries, particularly sfter september 11 2001. It picked up again in mid-2003 as companies that weathered the global recession sought bargains among their battered brethren. By the start of 2006 mergers and acquisition boom was in full swing, provoking a nationalist blacklash in some European countries. The future of the merger wave now depends on how deep the downturn in private equity proves to be.

posted by jx @ 8:34 AM