Buffett Confects One Sweet Deal
Financier Aids Mars's $23 Billion Bid for Wrigley

By Frank Ahrens
Washington Post Staff Writer
Tuesday, April 29, 2008

Chocolate colossus Mars is buying gum goliath Wm. Wrigley Jr. in a $23 billion, sugar-fueled deal that would create the world's largest candymaker and may reshape the landscape of the global confection industry.

Known sweet-tooth Warren E. Buffett, who owns See's Candies and Dairy Queen and is the largest shareholder of Coca-Cola, helped finance the deal with $6.5 billion from his company, Berkshire Hathaway. The purchase, announced yesterday, has been approved by both boards.

McLean-based Mars -- which had $25 billion in revenue in 2007, up from $18 billion in 2006 -- is paying Chicago-based Wrigley $80 per share in cash, a significant premium over Friday's closing price, $62.45. Shares of Wrigley, which would become a stand-alone subsidiary of privately held Mars and remain in Chicago, soared 23 percent yesterday, closing up $14.46 at $76.91.

It is the third-biggest proposed deal of 2008, trailing Microsoft's $42 billion bid for Yahoo and Swiss pharma-giant Novartis's $28 million try for eye-care company Alcon.

Mars, founded in 1911, makes M&M's, Snickers and Dove Bars, as well as Uncle Ben's rice and pet food lines. It controls about 19 percent of the U.S. candy market, second behind Hershey, said market researcher Euromonitor International, citing 2006 statistics.

Wrigley, founded in 1891, makes Orbit, Life Savers and Altoids mints, along with its namesake chewing gums. Wrigley has 8 percent of the U.S. candy market, Euromonitor said. Combined, the two would pass Hershey with more than 27 percent of the U.S. market.

Mars and Wrigley are both family-controlled companies and have been familiar with each other for years.

"The strong cultural heritage of two legendary American companies with a shared commitment to innovation, quality and best-in-class global brands provides a great basis for this combination," Mars Global President Paul S. Michaels said in a statement yesterday.

"The true value of this transaction arises primarily from enhanced growth opportunities, including the potential for cross-pollination of people, ideas and brands, and significant enhancements of sales, marketing and distribution infrastructures," Chairman Bill Wrigley Jr. said in a statement yesterday. He would become executive chairman of his company, reporting to Michaels. In a memo to his company, Wrigley said the combined company will have $27 billion in sales and 64,000 employees.

David Morris, senior analyst with market research firm Mintel, said the deal made sense, especially for Wrigley. Gum sales increased only about 3 percent last year -- "it's a mature industry," Morris said -- and England's Cadbury Schweppes has been making inroads into Wrigley's U.S. gum share.

Morris sees considerable growth for a combined Mars-Wrigley, especially in "harnessing gum as a delivery system for other things, from vitamins to energy," he said.

Analysts speculated yesterday that Hershey, which is owned by a family trust that has long resisted change, would now be forced to heat up long-simmering merger talks with Cadbury to fend off the combined might of Mars and Wrigley.

Until now, Cadbury has been the global leader in candy, with 10 percent of the world market. Hershey is the world's No. 3 chocolate-maker, behind Mars and Switzerland's Nestle, respectively, according to Euromonitor. The combined Mars and Wrigley would have at least 14 percent of the world market.

Shares of Hershey closed up $1.61 at $36.35 a share yesterday on speculation of a possible merger. But Merrill Lynch said in an analyst report that Hershey could be "left at the altar," predicting a Cadbury merger with Kraft Foods.

Candymakers guard their recipes jealously, but Mars is known for its Wonka-like secrecy. Once Wrigley is absorbed into Mars -- the deal is expected to close in six to 12 months, the companies said -- it ceases to be a publicly traded company. "What little we know about Wrigley will disappear into the ether," Morris said.

Joel Glenn Brenner, author of "The Emperors of Chocolate," said yesterday that the Mars family had always been satisfied to let the company's products do the talking.

"It's a private company, and they feel very strongly about the private part," said Brenner, a former Washington Post reporter. "They don't want the company to go public -- ever."

The company declined further comment yesterday.

Founded by Frank Mars, the company expanded under his son, Forrest, who died in 1999. It now is run by Frank Mars's grandchildren and has only a few dozen employees in the Washington region. Last fall, Mars caused a stir in the chocolate industry by saying it would not change the constitution of its chocolate by substituting cheaper vegetable fat for the more expensive cacao fat, which would be allowed under a pending proposal at the Food and Drug Administration. Other chocolate makers said they might use the substitute.

The company has spent millions on scientific research promoting chocolate and cocoa-based flavanols, an antioxidant that may have health benefits. Between 1997 and 2007, Mars spent more than $10 million on cocoa-related research at the University of California at Davis, the Sacramento Bee reported last year.

In a telephone interview with CNBC yesterday, Buffett implied that Mars brought the deal to him about two months ago, seeking financing to close the transaction. He said Berkshire Hathaway would probably finance other deals.

"We fit very well as a partner for what the Mars family wanted to achieve in the purchase," Buffett said. He would hold an equity interest in the Wrigley subsidiary. "They needed somebody they felt comfortable with, that they knew the check would clear, that wouldn't interfere in any real way."

Mars and Wrigley fit the 77-year-old Buffett's pattern of buying into large, stable, iconic American brands. On CBNC yesterday, he said he had been conducting a "70-year taste test" on Mars and Wrigley products and said he went to his first baseball game at Chicago's Wrigley Field, home of the Cubs, when he was 9.

Buffett said he likes Wrigley's Spearmint and Juicy Fruit gums, "loves" Mars's Dove bar and has "gotten into Skittles lately," also made by Mars.

Buffett, a Washington Post Co. director, declined a request for comment.

Staff researcher Richard Drezen and graphics editor Karen Yourish contributed to this report.