Monday, April 28, 2008

Mars-Wrigley? Buffett's Sweet Deal

We see a couple of candy companies getting together. Billionaire Warren Buffett sees a replay of the Procter & Gamble and Gillette merger. Allow me to explain.
In 2005, uber-investor Buffett was a big fan of the $57-billion merger of consumer giant P&G and razor blade maker Gillette. He should have been: His investment vehicle Berkshire Hathaway was a major Gillette shareholder and made an estimated $600 million on the day the P&G-Gillette deal was announced. Buffett's firm is now a major P&G shareholder.
While not an exact replica, the Mars-Wrigley deal has many of the same characteristics of the P&G-Gillette marriage.
First and foremost, P&G bought Gillette mainly because it did not have a razor blade business. More than that, Gillette gave P&G inroads into a broader worldwide distribution system, one with a growing presence in Latin America, Europe and the Far East.
Buying Gillette cost P&G a pretty penny but that was cheaper than building its own line of razors and blades--not to mention less expensive than constructing a bigger international distribution network.
Indeed, the purchase price, product synergies and global potential of the bigger distribution network were the major reasons why Buffett described P&G and Gillette's hook-up as a "dream" deal. On top of all this, P&G shares have had an impressive post-merger ride and the maker of Crest, Tide and other household products is considered one of the best run companies in the world--maybe even a growth stock.
One more thing: Unlike many hot-to-trot investors,such as hedge fund manager Edward Lampert, Buffett invests in the management of the companies he backs. Rarely does he come in and clean house.
Back to $23-billion Mars-Wrigley deal.
First and foremost, these two companies' brand lines are complimentary. Mars markets mostly chocolate products (Snickers, Milky Way and my personal favorite 3 Musketeers), while Wrigley hawks gum (Juicy Fruit, Doublemint) and the recently acquired Altoids brand.
Moreover, Mars is in 100 countries while Wrigley has a growing international distribution system. This newly-formed company will be much better poised to take on overseas competitors Cadbury Schweppes (and U.S.-based Hershey Co. if it ever gets its act together).
And while Buffett doesn't have stock in Mars as he did Gillette, the Oracle of Omaha is getting the next best thing.
The billionaire is backing Mars' management's play by putting down some loose change to help finance the Wrigley acquisition. He wouldn't do that if he didn't approve of those running both companies.
Moreover, Buffett's debt will eventually be converted to shares in a newly-configured Mars, which will still be privately-held. At 77 years old, Buffett is still one of the world's most patient investors. So, don't rule out Mars going public one day, enabling Buffett to reap yet another huge payday.
For Mars and Wrigley, there's no better stamp of approval than Warren Buffett.
He did great when P&G bought Gillette. He may do even better with this sweet deal.

(Illustration compliments of Businessweek)

20 comments:

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By far the best analysis I've seen.

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Well written, you reminded me of Pand G/Gillette-- something I should not have forgotten about.

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