Berkshire's Wrigley Windfall
Eight years after turning to Warren Buffett's Berkshire Hathaway for a helping hand in buying iconic chewing-gum maker Wrigley, Mars Inc. is ready to go it alone.
The McLean, Virginia-based confectioner on Thursday said it had bought Berkshire's stake in Wrigley -- a $2.1 billion preferred holding that the conglomerate obtained as part of Mars's $23 billion acquisition of the company in 2008.
The transaction was somewhat flagged by Berkshire, which said in its latest quarterly filing that it expected half the stake would be redeemed when the option became available Thursday. But Mars's agreement to purchase the whole amount likely came at an extra cost, as the candy maker would have been on the hook for another $262.5 million in dividends through 2021.
It's a prudent move for closely held Mars, which has already paid Berkshire $840 million in dividends on the preferred stock and separately forked out a premium to buy back $4.4 billion in bonds that Berkshire owned as part of the Wrigley deal's financing. And while it's unclear what Mars is paying for the preferred stake (filings show that consideration is dependent upon Wrigley's earnings), it's feasible that Berkshire will earn north of $1.7 billion in profits from this bet. 1
Now, Mars can potentially borrow at similar rates as other packaged food and beverage companies -- a less expensive option than Berkshire's preference shares. Coca-Cola, for instance, pays a weighted average coupon of 2.2 percent on its debt load, while Hershey pays 3.25 percent on average for its borrowings, according to data compiled by Bloomberg.
Betting on Wrigley was just one of a handful of deft moves made by Berkshire during the financial crisis. While the conglomerate's presence -- and confidence -- was far from a bargain, it enabled Mars to follow through on its consolidation efforts, some six years after a plan to buy Hershey for more than $12 billion was scuttled.
Berkshire's 2008 preferred-share bets on Goldman Sachs and General Electric have earned the company more than $2,3 billion combined. And its Dow Chemical stake, which has paid out a cool $255 million in annual dividends since 2009, has yet to convert. Although its Bank of America wager came after the crisis, those dividends are worth $300 million a year, while its warrants give Berkshire a paper profit of roughly $6.3 billion.
Buffett's reputation, Berkshire's track record and the company's enormous cash pile may ensure that the conglomerate gets more opportunities to lend a hand the next time Corporate America finds itself stuck for capital. Like always, it will come at a price.
Includes $840 million in dividends so far, potential prepayment of $262.5 million in dividends plus profits made on retirement of bonds in 2013.
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