April 28 (Bloomberg) -- Mars Inc., backed by billionaire Warren Buffett, agreed to buy Wm. Wrigley Jr. Co. for $23 billion to create the world's biggest candy maker.
Wrigley surged 23 percent in New York trading today after the companies said Mars would pay $80 for each of the gum maker's shares, with Buffett's Berkshire Hathaway Inc. providing part of the financing. Mars is offering 28 percent more than Chicago-based Wrigley's closing price on April 25.
The combined company will have $27 billion in annual sales and 14 percent of the world's candy market. Buffett will get more than 10 percent of Mars's Wrigley unit. Mars, the maker of M&Ms and Snickers, will add its Starburst and Skittles candies to 117-year-old Wrigley's Lifesavers and Altoids brands.
``It's a great price,'' said Thomas Burnett, director of research at New York-based Wall Street Access. ``Nobody is going to pay more than that. Who is going to go up against Mars and Buffett?'' He doesn't own shares of Wrigley or Berkshire.
Mars and Wrigley together will control almost 28 percent of the U.S. candy market, eclipsing Hershey Co.'s 24 percent share of consumer purchases, according to Euromonitor International Inc. in Chicago, citing 2006 sales. It will also become the largest candy maker in the world, surpassing Cadbury Schweppes Plc's 10.1 percent share.
The purchase will be financed with $11 billion from Mars, $4.4 billion from Berkshire and $5.7 billion from Goldman Sachs Group Inc. Berkshire will also buy a $2.1 billion stake in the Wrigley division once the purchase is completed.
Candy Brands
``There's really nothing that can go wrong with something like the Wrigley and Mars brands,'' Buffett, 77, Berkshire's billionaire chief executive officer, said today in an interview on the CNBC television network. ``People are eating more and more of their products every day.''
Berkshire also owns See's Candies, an 87-year-old confectioner in San Francisco, which had sales of $383 million in 2007, Buffett said in his annual letter to shareholders. Mars has annual revenue of $22 billion while Wrigley's sales were $5.39 billion last year.
Wrigley, which started trading on the New York Stock Exchange in 1923, jumped $14.46 to $76.91 at 4 p.m. The shares had gained 6.7 percent this year before today. McLean, Virginia-based Mars is the eighth-largest private company in the U.S., Forbes magazine said in November.
``Buffett gives it a lot of credibility so there's not a financing issue here, which is so important these days,'' Burnett said.
Hershey Shares
Hershey rose 4.6 percent in New York trading, while Cadbury climbed 2.8 percent in London as analysts including Eric Katzman from Deutsche Bank Securities Inc. suggested other mergers may occur. U.S. confectionary companies are exploring combinations as competition intensifies and milk and sugar prices rise.
Mars ``is primarily a chocolate company and we are primarily a chewing gum company,'' Bill Wrigley, Wrigley's chairman, said today on a conference call. Combining is ``about being able to invest for the long term and grow our business. We are very pleased with our competitive stance.''
Mars ``intends for us to run as a separate, stand-alone entity with a high degree of autonomy,'' said Wrigley, who plans to remain executive chairman and said other executives including CEO William Perez will stay in place. No employee cuts are planned, Wrigley said. It had about 16,400 employees at the end of 2007.
William Wrigley Jr. began selling soap in Chicago in 1891 and eventually turned to chewing gum, an item he was giving away for free with each sale, according to Wrigley's corporate Web site. He introduced Juicy Fruit and Wrigley's Spearmint in 1893, two brands the company still sells today.
Outside Chief
In 2006, Wrigley named former Nike Inc. chief Perez president and CEO, the first person outside the Wrigley family to head the company.
Sales at Wrigley may rise 9 percent this year, the slowest pace since 2000, according to the average estimate of nine analysts surveyed by Bloomberg. Competition from London-based Cadbury's Trident and Dentyne gums in the U.S. has eroded its market share.
Cadbury, the maker of Dairy Milk chocolate, bought Pfizer Inc.'s Adams candy unit for $4.2 billion in 2003 to become the world's second-largest maker of chewing gum.
The purchase price values Wrigley at 32 times estimated 2008 profit, compared with about 18 times earnings for the Standard & Poor's 500 Packaged Foods Index, according to Bloomberg data.
``This valuation looks extremely rich,'' Alexia Howard, an analyst with Sanford C. Bernstein in New York, said in a research note today. Wrigley hasn't traded at such a multiple since 1998, she said.
First Quarter
First-quarter net income climbed to $168.6 million, or 61 cents a share, compared with $142.7 million, or 52 cents, a year earlier, Wrigley said today in a separate statement. Revenue advanced 16 percent to $1.45 billion, helped by the weaker dollar and sales in China and Russia.
The trust that controls Hershey discussed ways to merge the chocolate company with Cadbury in a way that wouldn't decrease the trust's ownership, the Wall Street Journal reported last year. Cadbury will split off its U.S. drinks unit May 7 and begin trading as two separate companies: Cadbury Plc in London and Dr Pepper Snapple Group in the U.S.
A combination of Hershey and Cadbury probably won't happen, given the pressure that Cadbury faces from its shareholders to improve performance, Howard said.
``The idea that Cadbury's board would approve a sizeable deal and pay a significant control premium to acquire a weak performer in a slow-growing, developed market is extremely unlikely,'' she wrote.
Hershey Trust spokesman Tim Reeves declined to comment.
Mars History
Mars, founded in 1911 by Frank C. Mars, is still family owned. The company gets about 45 percent of revenue from chocolates and other snacks. Its biggest division is pet food, which sells Whiskas cat food and Pedigree for dogs, and accounts for 46 percent of sales, according to the company's Web site.
Berkshire Hathaway, based in Omaha, Nebraska, has about $40 billion to spend on acquisitions. Buffett has built Berkshire over four decades from a failing textile maker into a $195 billion holding company with businesses ranging from candy making to insurance.
Berkshire has stakes in companies including Coca-Cola Co. and Buffett ranks as the world's richest person, according to Forbes magazine.
Additional financing as well as advice is coming from JPMorgan Chase & Co, Mars said. Simpson Thacher & Bartlett LLP is acting as its legal counsel.
Goldman Sachs and William Blair Inc. provided Wrigley with financial advice. Skadden, Arps, Slate, Meagher & Flom, LLP served as legal adviser.
To contact the reporter on this story: Chris Burritt in Greensboro, North Carolina, at cburritt@bloomberg.net.
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