Buffett took a minority stake in Wrigley when his Berkshire Hathaway investment fund helped fund Mars’ takeover of the Orbit gum firm in 2008. The stake was preferred equity on which Berkshire Hathaway was paid an annual dividend.
Berkshire Hathaway put forward US$4.4bn towards Mars’ $23bn acquisition of Wrigley and paid $2.1bn for a stake in Mars’ Wrigley subsidiary when the transaction closed. The deal created the world’s largest confectioner, with brands including Snickers chocolate, Orbit gum and Skittles candy.
Mars ran its non-chocolate brands through Wrigley but said today (6 October) its purchase of Buffett’s stake would create a new division – Mars Wrigley Confectionery.
Grant Reid, of the office of the president and CEO at Mars, said: “We are grateful for the strong and productive partnership we have with Warren Buffett and Berkshire Hathaway. It is a great relationship that has yielded value on both sides. We’re equally pleased that sole ownership of Wrigley provides us with an opportunity to rethink how we simplify our chocolate and Wrigley businesses so that we can bring a more holistic approach to this vibrant category.”
Mars said its chocolate business and Wrigley would continue to operate separately “for the time being”. The company plans to “phase in” the combination during 2017.
Martin Radvan, the global president of the Wrigley business and a 30-year veteran of Mars, will lead the new Mars Wrigley Confectionery division. He said: “Mars Wrigley Confectionery brings together two great businesses, strengthening our ability to create win-win relationships with our customers, and improving our opportunities to address dynamic retail and consumer trends together.”
The transaction could make Mars a stronger business in the confectionery sector, Barclays Capital Andrew Lazar said.
Berkshire’s position in Wrigley stemmed from its role in funding Mars’ $23bn acquisition of Wrigley announced in 2008. Importantly, the structure of the 2008 merger was such that Berkshire’s preferred equity and debt positions were solely tied to Wrigley earnings and cash flow, and thus did not have any claim to the Mars side of the ledger. However, we believe a key implication of this structure is that it likely inhibited the potential for a full integration between the Mars and Wrigley entities, as we understand that some of the interactions may have needed to take place on an arm’s-length basis to prevent the co-mingling of cash flows and earnings. As a result, we think this move could free up Mars to potentially more fully leverage the combined scale of its legacy business and the Wrigley subsidiary, and thus perhaps enable it to become a more formidable competitor from a sales execution standpoint – which could have implications for Hershey, in our view,” Lazar wrote in a note to clients today. We think this situation merits watching.”