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Wrigley Deal Highlights Challenges Of Funding Giant Deals
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Snickers maker Mars Inc.'s decision to buy Wm. Wrigley Jr. Co. (WWY) with financial help from Warren Buffett's Berkshire Hathaway Inc. (BRKA BRKB) highlights the growing role that nontraditional sources of financing have begun to play in making deals.
Private equity firms and others were able to engineer giant deals in 2006 and early 2007, thanks mainly to easy access to financing from banks. But as debt investors became less willing to finance new deals, buyers have had to look into less obvious sources of funding.
"It's a large deal. Large deals are having a hard time getting done and Mars is probably looking for certainty on the financing," said Ken Wasik, an investment banker who heads the consumer products group at Jefferies investment bank, about Berkshire's role in the Wrigley transaction.
Berkshire is putting in the "subordinate debt" or the riskier layer, which is the part of debt that the market is having the most trouble with right now, he said. "The credit markets right now are not firmed up to the point where there is an active market for that type of financing," Wasik said.
Funding for the roughly $23 billion Wrigley transaction includes about $11 billion from Mars, a $5.7 billion committed senior debt facility from Goldman Sachs (GS), and $4.4 billion of subordinated debt from Berkshire Hathaway. At closing Berkshire will also buy a $2.1 billion stake in Wrigley at a discount to the price being paid Wrigley shareholders.
"There is no question that the financial markets are very challenging right now," said Executive Chairman Bill Wrigley Jr. during a conference call Monday. "Coming up with the capital to make this deal work was a challenge." More details on the structure of the deal are likely to available in securities filings in coming weeks.
In recent months, another consumer products deal also utilized a different source of funding. ConAgra Food Inc. (CAG) in March agreed to sell its trading unit to a hedge fun. But ConAgra said it would itself finance $525 million of the purchase price through the receipt of three tranches of debt securities.
In the near term there could be more of these deals that tap other sources of funding, said Wasik. But in the long term debt markets should improve and " markets should be returning to normalcy where such deals can be done with certainty," he added.
Wrigley shareholders, at least, had plenty to be pleased about Monday. Shares recently rose 23.2% to $76.95 on volume of 19.8 million compared with average daily volume of 1.4 million. Earlier, shares reached a 52-week high of $77.75.
"It's right up his alley," said Don Yacktman, president of Yacktman Asset Management of Buffett's role. "He's paying up for this thing, but each of these companies is highly profitable and it makes great long-term sense from a business standpoint." Wrigley is one of the top ten holdings of Yacktman's fund.
The deal also sparked chatter about the possibility of more deals in the candy industry. Shares of Hershey Co. (HSY) rose 4.3% to $36.24, and Cadbury Schweppes (CSG) gained 2.9% to $46.11. Wrigley executives also acknowledged during the conference call that the industry could see more consolidation. Hershey declined to comment and a Cadbury representative couldn't immediately be reached.
"Our guess is that (Hershey) will rise today on a belief that Hershey, pressured by a giant Mars-Wrigley competitor, will be forced to combine with Cadbury's confection arm," Bear Stearns analyst Terry Bivens wrote in a research note to investors early Monday. But in the longer term, he believes thinks Hershey will continue to underperform. "It will take a long time - as in years, if ever, for the majority-owning Hershey Trust to agree to any sale of the company," he said.
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