Glenboden M & A Originations

Mars likely to divest Uncle Ben's owing to Wrigley acquisition

Priority Rating priority rating 4
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Origination Status 100% cash offer recommended by both boards in April 2008
Asset Wm. Wrigley Jr. Company (USA), global no. 1 chewing gum producer
Buyer Mars Inc. (USA), global no. 2 confectionery producer
Seller Wrigley family and public shareholders
Buyer Rationale creation of global no.1 confectionery business ahead of Cadbury
Seller Rationale attractive valuation with promise of retaining independence
NBs offer represents 30% premium to pre-announcement Wrigley share price
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A truly surprising deal, as Mars is notorious for avoiding significant M&A activity. In fact, the only non –pet food acquisition it’s made, this generation, seems to be that of a small organic food producer in the US, Seeds of Change, in 1997. We think that the somewhat forced nature of this deal, as well as the participation of Berkshire Hathaway in its financing, will later cause Mars to sell its global grocery business, led by its iconic Uncle Ben’s brand.

Mars’ fortunes have been mixed over the last decade, notably with its battles with Hershey in confectionery and Quaker Oats in branded rice in the US. On top of that, with two-thirds of the group’s revenues derived outside the US$ zone, mostly in developed markets, it’s recently had a profits windfall without even trying. So, this acquisition will add new dynamism to Mars, as well as soak up its recent financial good fortune.

However, the Wrigley family has a controlling stake in that company and, to convince them to sell, Mars is not only paying a very high valuation, but has also agreed (i) to Wrigley remaining a stand-alone subsidiary and (ii) to fold its sugar confectionery business into that subsidiary. So, synergy extraction is as badly needed as it is difficult to foresee post –acquisition here; this may well cause Mars to sell off non –core businesses later, to reduce the financial burden of the deal.

That financial burden, leaving aside senior debt, is to be provided by Warren Buffet’s Berkshire Hathaway funds, in the form of $ 4,4 bln in subordinated debt and, more significantly, $ 2,1 bln in equity capital in return for a minority shareholding in the Wrigley subsidiary. Undoubtedly Mars will be required to buy out this equity stake in a few years’ time at the latest. How will that be funded with an independent Wrigley so without significant cost synergies ?

The answer may well lie in Mars’ grocery products business, led by the Uncle Ben’s rice portfolio as well as cook-in sauces and frozen foods under that and other brands notably Dolmio. That business generated $1,5 bln in sales in 2007, which is only 7% of the group’s total revenues. It is clearly non –core and, were it not for the fact that Mars is a very conservative private family business, would have been on sale by now given (i) its weak market share in several European markets and (ii) high commodity costs which are affecting grocery products businesses in particular.

Warren Buffet might now give the Mars family that final push to sell. If that business is sold for e.g. x1,5 Sales, it could be enough to buy out his equity stake in Wrigley.

Who are the likely buyers ? Campbell Soup should be looking for acquisitions at this point, and Uncle Ben’s could make a nice fit. Heinz is another option. Otherwise it’s a small enough asset, and in the right sector, to attract a lot of private equity interest.

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THIS LEAD'S VALUATION
Size (€ mln) 14.375
Sector chewing gum
Asset Quality global no.1 branded
Seller large plc
Buyer private corporate
P/S 4,25
P/Ebitda 18,45
Type enterprise value
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