Mars- Wrigley Case Study- Solution

Mars and Wrigley Case Study

Sl. No. 1 2

Group Members' contribution to this Project Student ID Student Name Contribution % 10008 Archana Mantri 50% 10089 Sidhartha Modi 50%

Total

100%

1. What were the compelling reasons for Mars (an unlisted company) to acquire Wrigley? What were the compelling reasons for Wrigley (a listed company). Answer:

Mars would like to acquire Wrigley for the following reasons: 

   

To strengthen and diversify its position in the confectionary business worldwide. It will have wider geographic presence and new markets and a variety of new products. To increase its market power and become World’s biggest Candy maker. To effectively compete in an industry where competition is intensifying and the price of milk and sugar are on a rise. To encash the brand Value of Wrigley which is a known name in the confectionary market. To increase efficiency and reduce operating cost.

The compelling reasons for Wrigley are the following:    

Tough competition from other companies and declining sales rise. A very good price paid by Mars Inc. Mars intention to run Wrigley as a separate, standalone subsidiary with high degree of autonomy and retaining its management and employees. The combined entity could face the competition better and emerge as more successful and profitable.

2. Is this a case of Merger or Acquisition? Why? How would you classify the coming together of the two companies – Vertical, Horizontal, Conglomerate or something else? Answer:

This is the case of Acquisition. Because Mars Inc. would buy Wrigley and Wrigley would be a subsidiary of Mars Inc. Mars is paying hefty consideration to acquire Wrigley and though the management of Wrigley will almost be the same, the executive chairman of Wrigley would report to Paul Michaels, Global President of Mars. This is Horizontal acquisition. Because both the business are similar and this acquisition expands buying company’s scope. 3. What was the structure of the combined entity post acquisition of Wrigley? Answer:

Wrigley would function as a separate, standalone subsidiary with high degree of autonomy. The executive chairman and other executives including the CEO will stay in place. No employee cuts are planned. Only the executive chairman Wrigley would report to Paul Michaels, Global President of Mars. The financing would be done through

equity, debt from two big financial institutions and debt from Warren Buffet’s Berkshire Hathaway Inc. which will also own a part of equity in the post acquisition company.

4. What is the impact of this M&A for the industry? Answer:

The combined entity will emerge as the World’s largest Candy maker with $27 billion in annual sales and 14% of world’s candy market which makes it the largest candy maker in the world, surpassing Cadbury Schweppes, PLC’s 10.1% share. It will control the highest share of consumer purchase of the U.S. candy market. The merger and acquisitions started having a Reverse Termination Fees in a big way. 5. On reading these two reports, what are the various aspects, from your perspective, that make this deal a stand out illustration? Answer:

The various aspects which make this deal a stand out illustration are the following:  The Position of Wrigley as a Separate, Standalone entity with considerable autonomy and retaining of the previous management and employees.  The view to handle competition, increase efficiency and decrease cost by coming together.  Use the brand name of the companies to capture a greater market share and expand the product offerings.  It creates a vast variety of products starting from candy to pet food to come under one umbrella and thus the offering range becomes very diverse. 6. Who are the various players in this transaction and how do you think that the players would have influenced the outcome of this deal? (In other words, how do you think each player involved in this deal would have contributed to this deal?) Answer:

The various players in this deal are:  Mars Inc.: The buying company. By offering to pay a premium of 28% over the prior days market price of Wrigley which was very lucrative to be denied. They paid a sum of $23 billion at $80 per share. They also made the terms of agreement in such a way that provided greater autonomy to Wrigley but also contain a clause wherein they could walkway from the transaction on payment of a Reverse Breakup Fees.  Warren Buffet’s Berkshire Hathaway Inc.: Party to the buy. Warren buffet’s company not only provided $4 billion loan to Mars but also agreed to buy $2.1 billion stake in the Wrigley division once the purchase is completed. Warren buffet reputation provided a security to Wrigley who agreed to accept a transaction without specific performance and assented to a merger agreement that allowed Mars to walk for any reason on payment of a reverse breakup fee and explicitly barred specific performance. Also no firm would challenge his offer.





Wm. Wrigley Jr. Co.: The target company. The company offered to sell itself on the terms and payment agreed upon with Mars Inc. the company with its global presence and famous products would add value to Mars Inc. and help it in diversifying its product and geographical reach. It agreed to work as a subsidiary company and to the terms laying down work away right to the buyer. Goldman Sachs Group inc. and J.P. Morgan Chase and Company : apart from providing financial advice to Mars Inc. they would also finance the deal and being a big name would lend credibility to the deal. Goldman Sachs would also facilitate the debt of $5.7 billion going into Wrigley’s Balance Sheet after closing. J.P. Morgan Chase and Company agreed to furnish $11 billion in debt that would stay with the Parent.

7. Summarise the various valuation aspects of this deal. Do you think that Mars over paid for this M&A? Why? Answer:

The valuation aspects of this deal are  The fair market value of Wrigley.  Synergy premium including revenue enhancement through increased market power, better and more efficient marketing efforts, entry into new market, expansion in product range and operating efficiency arising from economics of scale and more efficient management. The deal price is fair enough because of the synergy benefits Mars would acquire. It will get entry into new markets and efficient distribution system which would help it to market its product in better way also, since this is a horizontal merger the Mars will add to its product range and this deal will also enhance its brand image. It will emerge as the largest Candy maker which enhances its reputation. Also it will be able to handle the intensifying competition and price rise in the raw material in a better way. Thus the benefits it gets from acquiring Wrigley adequately are compensated by the price it pays. 8. How did Mars plan to finance the transaction? How did financing aspect of this deal influence the proposed structure? Answer:

The financing would mainly come from Mars’s Banker J.P. Morgan Chase & Co. who will furnish $11 billion in debt. Goldman, Sachs & Co. which also provided financial advice to Wrigley would fund the deal with $5.7 Billion as senior debt facility which would go into Wrigley’s Balance Sheet after the completion of the deal. The balance amount would be acquired in a form of debt by Warren Buffett's Berkshire Hathaway Inc. which would buy $4.4 billion of subordinated Wrigley's debt. It would also purchase $2.1 billion in Wrigley’s Stock after the completion of the deal.

9. Well, this is a tough one! Prepare a ‘M&A Balance Sheet’ for both the companies (you will have to make reasonable and suitable assumptions). In the books of Mars Inc. M&A Balance Sheet Equity & Liabilities

Amount

Assets

Loan (JP morgan)

11.0 Assets

Contigent Liability

12.2

-Subsidiary (Wrigley)

23.2

Equity & Liabilities Equity -Berkshire Hathaway -Mars Inc Loan (Goldman Sachs) Subordinated debt (Berkshire Hathaway)

Amount 23.2 23.2

In the books of Wrigley M&A Balance Sheet Amount Assets Cash and Bank balance 2.1 11.0 5.7

Amount 23.2

4.4

23.2

23.2

Assumption: if Wrigley is not able to pay its liability then Mars Inc. will be liable to pay its Liabilities. 10. What kind of innovation did Mars bring into this deal structure that was not prevalent earlier with other M&As? Briefly explain your understanding of this innovation. In this context, explain the following terms: a) Specific performance b) Break-up fee c) Reverse break-up fee d) Walk out Answer:

Mars inc introduced a concept of Reverse Breakup fee where in if it walks out of the deal due to sum financing or other problem it can do so on a payment of $1 billion reverse Breakup fee and explicitly barred specific performance. a) Specific Performance: Specific Performance is the obligation that requires carrying out a specific act, what is stated in a contract. It can be forced upon the

party which backs up from the contract to save guard the interest of the innocent party. Orders of specific performance are granted when damages are not an adequate remedy. Thus it is an equitable rather than legal remedy. (Reference: http://en.wikipedia.org/wiki/Specific_performance) In this case, Specific Performance means carrying out the deal and the actual transaction taking place which has been barred b) Breakup Fee: A breakup fee (sometimes called as termination fee) is a penalty levied on the target company in a takeover agreement if the target company backs out from the deal because of some more lucrative offer or any other reason. This compensates the original buyer for his time and resources expended and inhibit Target Company to go for such an action. (Reference: http://en.wikipedia.org/wiki/breakup_fee) In this case nothing has been mentioned about breakup fee. Only reverse breakup fee has been discussed. c) Reverse Breakup Fee: if the buying company walks out of the deal because of lack of financing or some other reason, the damage it pays to the target company to avoid lawsuits, disruption of business operation, and the loss of key personnel during the period the company is operational is known as Reverse Breakup Fee. (Reference: http://en.wikipedia.org/wiki/breakup_fee) In this case Mars Inc can walk away from the deal on the payment of Reverse Breakup fee of $1 billion. d) Walkout: Walkout is the non execution of the deal wherein one of the parties abandons the deal because of inability or some other more lucrative offer. It is like breaking an alliance. In this case Mars Inc can walk out from the deal on the payment of Reverse Breakup fee of $1 billion. 11. What was the impact of the announcement of the deal on the stock market prices of Wrigley and Mars? Who gained? Why do you think the competitor share prices increased even though they are not part of THIS M&A process? Answer:

The stock price of Wrigley shot up by 23% in New York Trading the day after the announcement that Mars would pay $80 per Share to Wrigley. It went up to $76.91 per share which it had never achieved before. Mars Inc. was not listed in the Stock exchange. Wrigley gained as well as the competitor of the industry. The competitor share price surged even though they were not a part of this M&A process because of the further anticipation of such a M&A taking place between rival companies. It was necessitated to face the intensifying competition and met the price rise of milk and sugar through cost saving and efficient management of the combined

entity. Hershey shares shot up almost 5%, while Cadbury's U.S.-listed shares rose nearly 3%. Shares of Tootsies Roll Industries Inc. also were on the rise, up more than 6%. 12. Track the stock prices of Wrigley and Mars, post this acquisition until Sep 2011. Answer:

Wrigley was delisted after it was acquired by Mars Inc. Mars itself is not listed in any exchange. The data available here shows that the price moved upward till 6 th of October 2008 when it was delisted. Date

Price

08-09-2008 09-09-2008 10-09-2008 11-09-2008 12-09-2008 15-09-2008 16-09-2008 17-09-2008 18-09-2008 19-09-2008 22-09-2008 23-09-2008 24-09-2008 25-09-2008 26-09-2008 29-09-2008 30-09-2008 01-10-2008 02-10-2008 03-10-2008 06-10-2008

79.59 79.45 79.53 79.58 79.50 79.00 79.13 78.00 79.50 79.65 79.00 79.45 79.53 79.58 79.63 79.06 79.40 79.52 79.67 79.77 79.97

(Refernce: www.wrigley.com/global/documents/historical_stock_prices_2000_through_2008c.pdf) 13. Post the Wrigley acquisition, what are the major developments in global markets for corporate control in Snacks and Food Industry. Answer:

Several M&A have taken place to gain major share in the snack and food industry. One of the biggest acquisitions has been hostile takeover of Cadbury by Kraft foods limited in January 2010 at price of 840 pence per share which was paid partly in cash and partly in equity totalling to £11.9 billion.

PepsiCo in November 2011 defeated Bunge Inc. And Mexico’s Grupo Bimbo to win the bidding for Mabel which is a Brazilian Biscuit manufacturer for consideration between 800 million Brazilian reais and BRL 900 million. Mabel manufactures 1.5 million biscuits every day. (Reference: www.potatopro.com/Lists/News/Dspform.aspx?ID=6118) Nestle is in talks with Chinese Snack and Candy maker Hsu Fu Chi International Limited on acquisition. It is to be approved by Chinese regulator Guangdong Province based Hsu Fu Chi has a market capitalisation of $2.6 billion. In may Yum! Brands Inc owner of Kentucky Fried Chicken fast-food chain, offered to buy Little Sheep Group Ltd in a deal that valued the operator of hot pot restaurants at $6.7 billion ($861 million). (Reference: www.chinadaily.com.cn/bizchina/2011-07/05/cotent_12836400.htm) Several other merger and acquisition has taken place while some other are in the pipeline these M&A are supposed to change the entire face of Snack and Food Industries.