A Sugary Mouthful

Mars buys Wrigley with Warren Buffett's help.
Economist StaffMay 2, 2008

OF ALL the possible snacks, the deal was struck over a plate of sandwiches. Paul Michaels, the boss of Mars, a big maker of chocolate bars, invited Bill Wrigley, executive chairman of Wrigley, the world’s biggest chewing-gum company, to his house to persuade him that the two firms were a perfect match. After all, both are old, American and dominated by their founding families. They have both focused on creating a few global “power” brands such as Mars’s Twix, M&M’s and Snickers and Wrigley’s Extra and Orbit. And there is little overlap between them.

A few weeks later, on April 28th, Mars and Berkshire Hathaway, Warren Buffett’s investment firm, announced a friendly takeover of Wrigley for about $23 billion. Mr Wrigley, who presented strong results for the first quarter on the same day, says his family did not need a lot of convincing to accept. They could see the advantages of a bigger global distribution network, whereas the Mars family liked the idea of diversifying into gum, which is considered healthier and has higher growth rates than chocolate. Mars is offering a 28% premium over the price of Wrigley’s shares before the deal was announced. Mr Wrigley and other senior managers will remain in place. The firm will keep its close association with Chicago—Wrigley Field is the home stadium of the local baseball team, the Cubs. Mars will even move the offices of its non-chocolate division to the Wrigley building, a Chicago landmark.

“The price is high,” admits Olivier Goudet, Mars’s finance chief. But Mr Goudet thinks savings in distribution and marketing will outweigh the cost of the merger in the long run. Mars, which is America’s third-largest privately owned firm after Cargill, an agricultural company, and Koch Industries, a conglomerate, can afford to take a longer view. “We have no intention ever to go public,” says Mr Michaels. Mr Buffett, meanwhile, will receive a 20% stake in Wrigley on preferential terms, in exchange for offering a $4.4 billion loan—a huge boon in such credit-starved times.

The deal is a challenge to Cadbury, which is also trying to focus on chocolate and chewing gum. It is about to spin off Dr Pepper Snapple Group, its American drinks business, leaving only confectionery. But a combined Mars and Wrigley will control some 14% of the global market, compared to Cadbury’s 10%, giving them greater clout with retailers. And Cadbury is already under intense pressure from shareholders to improve its margins.

Cadbury may start looking for acquisitions of its own. Kraft’s confectionery unit is one possible target, although Cadbury would struggle to pay for it. It had originally hoped to sell its drinks unit to a private-equity firm for a higher price than it is likely to raise on the stockmarket, but the credit crunch wrecked that option.

Hershey, with its 43% share of the American chocolate market, the world’s biggest, is another candidate. The two are a near-perfect fit, and have discussed a tie-up in the past. But Cadbury cannot buy Hershey without the approval of the Hershey Trust, which owns 78% of the firm and is determined to retain control. What is more, Hershey has been struggling with higher commodity prices, falling margins and flat sales. According to Andrew Wood, of Sanford Bernstein, a research firm, the savings from such a merger would probably be too small to justify the deal.

So Cadbury and Hershey are likely to face the new goliath alone. That may not be the end of the world: as it is, Cadbury is making inroads into the American gum market, while Wrigley’s share has dropped from 66% to 60% in two years. It could also swallow a smaller rival, such as Lindt, a Swiss chocolate firm. Its boss is adamant that it’s not for sale—but that is what Wrigley used to say, too.

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