Shut down the headquarters of Wm. Wrigley Jr. Co. (WWY). Convert the landmark Wrigley Building into condos. Tear the Wrigley name off the Chicago Cubs' ballpark. Close the corporate wallet to local nonprofits. Fire a whole lot of people. This is the future many Chicagoans saw on learning that after 117 years here, the Wrigley family's company had been sold to Mars for $23 billion, to create the world's biggest candy producer. Holy Cow.
Don't worry, Bill Wrigley assured one and all. The company's executive chairman and great-grandson of its founder insisted that the only thing that is changing is the owners; everything else would remain as it has long been. His namesake confectioner would remain in Chicago, run from the Wrigley Building by the same generals and rank-and-file on the payroll before Mars came to him with an all-cash offer simply too rich to pass up. Right now, it looks as if everybody—from the mayor to the media—wants to believe him.
Big Premium, Big Cuts
It's a sweet sentiment. But I'll wager a king-size Milky Way bar that in a few years, Chicago won't recognize the old Wrigley as it is downgraded into just another regional office of a giant corporation based someplace else. Why the skepticism? For one, the deal itself will force this outcome. For another, previous takeovers of age-old companies by out-of-towners have all ended this way.
Big premiums mean big cuts, and Mars is clearly paying a big premium. Its $80-a-share price is 34% higher than Wrigley's three-month average price before the deal was announced on Apr. 28. That's a great payout for Wrigley stockholders, including Bill Wrigley, who'll pocket an estimated $1.3 billion. But even for an outfit as large as Mars, which had $22 billion in sales in 2007, it's a stretch. To come up with the cash, the privately held candymaker had to borrow $10.1 billion from Goldman Sachs (GS) and Berkshire Hathaway (BRKA).
Berkshire Chief Executive Warren Buffett is the epitome of a patient investor, even at age 77. Still, that money will have to be paid back with interest, and Mars won't be able to do it just by selling packs of M&M's and Orbit. Instead, it'll require selling superfluous assets, consolidating redundant operations, and cutting costs, including labor.
Unloading the Wedding Cake?
The chewing-gum company is sitting on one quick source of cash—its North Michigan Avenue headquarters. The 1920s-era building is beautiful but expensive to maintain. In 2005, Wrigley explored the notion of turning the terra-cotta "wedding cake" into luxury condos but tabled the idea. The Mars family would have no emotional ties about unloading it.
Despite Bill Wrigley's soothing commentary, it's also hard to see him—or his right-hand man, CEO Bill Perez—staying on. Once the takeover is complete, both become wealthy hired hands with no ownership. Relegated to a subsidiary, they would report to Mars Global President Paul Michaels and the secretive and demanding Mars family. I wouldn't expect a former chairman and member of a company's founding family to play second fiddle for very long, especially after he has cashed out. As for Perez, he clearly has ambitions. Why would someone who ran Wrigley, with $5.4 billion in annual sales—and before that, Nike (NKE)—want to move down the pecking order after working so hard to get to the top?
The sad thing is we've heard assurances like these too many times before in Chicago. Amoco, Ameritech, and First Chicago are among homegrown institutions that have been bought by outsiders. At first, the acquirers swore that nothing would change. But before long, each was subsumed into the parent, greatly diminishing local management and operations, along with philanthropic and civic giving. Thousands of jobs were lost. Bill Wrigley insists that this acquisition will defy history. But when Mars wraps up the deal, the company will lose control of its fate. All else is sound and fury.