Mars's Takeover of Wrigley Creates Global Powerhouse

Mars's Takeover of Wrigley Creates Global Powerhouse

 

Closely Held Firm To Pay $23 Billion; Kitchen-Table Talks

 

Discussions between Wm. Wrigley Jr. Co. and Mars Inc. to blend two of the best-known names in sweets into the world's largest candy maker began, like any important family gathering, around the kitchen table.

On April 11, Bill Wrigley Jr., executive chairman of the chewing-gum empire that bears his name and the fourth consecutive Wrigley to lead the company, went to McLean, Va., to meet with Mars Global President Paul Michaels and Chief Financial Officer Olivier Goudet. They had called Mr. Wrigley to request the meeting, and before long the three men were sharing sandwiches over Mr. Michaels's kitchen table.

By the early hours of Monday morning, the two sides had finalized a deal. Mars, together with Warren Buffett's Berkshire Hathaway Inc., agreed to acquire Wrigley for about $23 billion. The transaction, expected to close in six to 12 months, joins two of America's ubiquitous brand names: Wrigley, maker of the eponymous chewing gum, and Mars, the closely held company behind Snickers chocolate bars and M&M's.

Under the agreement, Wrigley shareholders will receive $80 in cash for each share held, a 28% premium to Friday's price. On Monday, shares rose 23% to close at $76.91 in 4 p.m. composite trading on the New York Stock Exchange.

The deal was a big surprise across Wall Street late Sunday, but the effects are clear: a colossal candy-and-gum company investing in new markets around the globe, without having to answer to public shareholders. That freedom and market power pose a threat to the other major food companies -- particularly Hershey Co. and Cadbury Schweppes PLC -- that have been weighing merger plans for years. Both Hershey's and Cadbury's shares rose Monday.

While both Mars and Wrigley tout the comfortable fit of products and cultures, Mars has no experience with a deal of this scale. And it's moving into Wrigley at a very high price, paying 32 times Wrigley's expected earnings for 2008. That means that even if Mars is successful in integrating the company, it may be difficult for it to turn a decent profit without substantial revenue growth in the years ahead.

Though the Mars-Wrigley deal was completed in a matter of weeks, it had been contemplated for years. Mars, which is 100% owned by the Mars family, had known for some time that it would one day woo Wrigley, people familiar with the matter say. "It was a matter of when, not if," said one person involved in the deal.

Like many families that own businesses for generations, the Wrigley family, which controls at least two-thirds of Wrigley's supervoting B shares, had become less engaged in the company. Mr. Wrigley -- who controls 45% of the B shares through trusts and is the only member of the family who's deeply involved in the business -- said he didn't have much discussion with relatives during the negotiations.

The move is a bold one for the Mars family, led by brothers John Mars and Forrest Mars Jr., both former presidents of the company. Today some of the Mars brothers' children hold various management positions at the company, according to a Mars spokeswoman. A message left at the Mars family ranch in Wyoming was not returned.

Meeting in the Kitchen

At the meeting in Mr. Michaels's kitchen, Messrs. Michaels and Goudet walked through their rationale for combining the two companies, but they made no offer. One of the keys to the strategy is distribution, pushing more gum and more candy in more spots around the globe, such as India, China and Russia. Joined together, they could reach these markets more effectively. "I basically did a lot of listening at that point," Mr. Wrigley said in an interview Monday.

Mr. Michaels, Mars global president, said plans to buy Wrigley first came together about three months ago. Getting the phone call "was a surprise," Mr. Wrigley said. "I wasn't sure, and they were not very specific even when they called me, what they wanted to meet about. I just came in cold."

After his return to Chicago, Mr. Wrigley briefed his company's board, and it gave the go-ahead to continue talks.

Longtime Mantra

He said he kept in mind his longtime mantra of respecting the past but doing what was right for the future.

"When you cling to beliefs of the past too much, you end up making the wrong choices," Mr. Wrigley said. He also felt that the regulatory pressures and disclosure requirements make publicly held companies less competitive, and that going private would relieve many of those pressures. Wrigley, which has annual sales of $5.4 billion and employs about 16,000 people, has been a public company since 1923.

In discussions with Mr. Wrigley, Mr. Michaels argued that the two companies would fit well together because of their similar histories and shared values, according to people familiar with the matter. Mars was willing to pay a hefty premium, while also preserving the Wrigley name and the company's presence in Chicago, but Wrigley pressed for a better offer.

Wrigley's board was concerned about the certainty of the financing for the deal given the tight credit markets, said William Perez, Wrigley's president and CEO. The Mars clan knew early on that it would need a partner to complete the transaction. Mr. Buffett fit the bill, both for his deep pockets and reputation for discretion.

Mr. Wrigley said that part of the reason Mr. Buffett got involved was because "he's one of the few people in the world with access to large sums of capital" and because "he tends to do things very quickly and very efficiently."

A key figure behind the transaction was Goldman Sachs partner Byron Trott. Mr. Trott has worked for Mars and Wrigley and is a favorite of Mr. Buffett, who said of the banker in his most recent investor letter: "I trust him completely." People involved in the transaction say these relationships were crucial to its success.

Mr. Trott, representing Wrigley, approached Mr. Buffett about joining with Mars. A longtime admirer of Mars, Mr. Buffett readily agreed. In an interview with CNBC, Mr. Buffett said he got involved in the deal because the two companies have great brands. "I've been conducting a 70-year taste test...and they met the 70-year taste test," Mr. Buffett said. "The Mars people asked me about participating in this, and we are financing. But we are a very, very junior partner, although we will have about $6.5 billion in it." He said he does not anticipate tying the Mars and Wrigley brands with any of his other investments in sweets, which include See's Candies and Dairy Queen.

As the deal came together, a roughly 12-person team on the Wrigley side was calling each other so frequently that Mr. Perez kept with him a small laminated card with each of their phone numbers.

Last week, Mr. Wrigley went to Wyoming to meet with members of the family that controls Mars to get to know them, he said.

Negotiations got "more active" over the weekend as the two sides pulled together the details. Wrigley got Mars's final offer at 5 p.m. Sunday, and Wrigley's board approved the deal in a phone meeting that concluded an hour later. The two sides were still exchanging documents to finalize the agreement at 2 a.m. Monday.

Mr. Michaels said that speculation of deals involving candy players Hershey and Cadbury did not prompt his company to buy Wrigley.

"What came into play more was, when you look at an offer as a director of a company...you say, 'OK, I could get this amount per share now versus some number, kind of guessing in the future,'" Mr. Wrigley said. "If that number gets big enough now, there's risk in any company of something happening that won't enable you to get to a bigger number in the future."

Mr. Wrigley said he plans to stay involved in the business and will remain its executive chairman.

While Wrigley started in the late 19th century on the strength of chewing gum that Mr. Wrigley's great-grandfather originally gave away to sell baking powder, Mars has its roots in the home-made butter-cream candies Frank C. Mars and his wife, Ethel Healy, made out of their kitchen in Tacoma, Wash.

Mars is now a diversified, global food company that sells everything from pet-food brands such as Whiskas and Pedigree to food and beverage brands such as Uncle Ben's rice and Flavia coffee. The company has $22 billion in annual revenues, about 70% of which is generated outside of the U.S.

The company is 100% owned by the Mars family. In addition to holding management positions, members of the family sit on the company's supervisory board. Mr. Michaels is an outsider who joined Mars more than 10 years ago and has been global president for the past four years.

First Move

The Wrigley company made its first move away from family control in October 2006, when Mr. Wrigley announced he would step down as CEO to become executive chairman. The company named Mr. Perez the first non-Wrigley family CEO in the company's then 115-year history.

Mr. Wrigley has been much more of a risk-taker than his father, who died suddenly in 1999. He has pushed to diversify the company beyond just a gum maker and transform Wrigley into a broader confectionery company. He dabbled in medicinal gum and bought the Altoids and LifeSavers brands from Kraft Foods Inc. while also holding to traditions, like hiring a new pair of Doublemint twins.

His boldest move never saw fruition. In 2002, Wrigley beat out Nestlé SA and Cadbury with its $12.5 billion bid to buy Hershey. But the trust that controls Hershey got cold feet and the deal fell through at the last minute. Some analysts and investors, though, felt Mr. Wrigley was a bit too risky at times and that he and his board realized they needed the expertise of a more seasoned consumer-products executive.

Mr. Perez was brought on at a time when the Wrigley company was struggling to integrate LifeSavers and Altoids -- its biggest acquisition ever. Some analysts felt the company paid too much for the ailing brands. After initially telling investors that the deal would boost earnings in 2006, Mr. Wrigley later admitted that the brands -- acquired for $1.46 billion in 2005 after the deal was announced in 2004 -- needed more investment and would sap 2006 profits.

Though it's public, Wrigley has some operating practices of a private company. It does not hold quarterly earnings calls and only addresses its shareholders once a year at the annual shareholders meeting.

The Federal Trade Commission is expected to review the deal but is unlikely to challenge it on antitrust grounds, lawyers said. While both companies are market leaders in the candy business, investigators are likely to focus on the companies' individual product lines, which are largely complementary.