I don’t know how many of you caught the news last week about the acquisition of Wrigley by Mars (see A Sugary Mouthful for background). It was a pretty high profile deal, so I trust many of you have heard something about it. After all, it has garnered its fair share of attention in the popular press - having been analyzed in various ways by various people.

Most observers (at least in the opinions that I’ve read) seem to believe that the combination of Mars and Wrigley is a good one. The two are complementary on many dimensions - product, distribution, marketing, and manufacturing. On this I do not disagree. I therefore see the strategic logic for their combination, and there are certainly opportunities for synergies.

There are two potential problem areas that remain. First, did Mars overpay for Wrigley? Unfortunately, because Mars is a private company, I was not able to observe the stock market’s reaction to its bid. In the absence of that, I cannot make a meaningfully informed judgment. However, I will say that the 28% premium didn’t strike me as outlandish, although it might prove a little pricey (at 4 times sales) for a company Wrigley. Second, will Mars’ intentions to keep Wrigley’s headquarters in Chicago (and make Chicago the headquarters for all non-chocolate products) limit managerial synergies and keep the cost structure of the combined entity higher than it ought to be? After all, why not consolidate management in either McLean or Chicago?

Taking all that into account however, I still tend to side with those who believe this is a good, sound deal.

But that’s not why I’m writing this post. The real reason I decided to write this post is because of its non-traditional mode of financing - with Warren Buffett kicking in $4.4B. Far fewer have written about Buffett’s role in this deal, and I was hoping to shed a little light on that aspect of the story.

My sense on Buffett’s participation is that in different (non credit crunchy) times, this deal would probably have been financed via the standard routes - using an I-Banking firm as an underwriter that would have provided the bridge financing to complete the deal until the debt could be sold. However, my guess is that given the difficulties that the banking industry has been experiencing, either the I-Banks did not have the cash available to underwrite the deal, or were unwilling to do so with reasonable terms. Enter Buffett.

Now I’m not sure how or why this deal ended up on Buffett’s desk, but replete with cash when lots of others find themselves liquidity-constrained, Buffett was likely more than happy to take advantage of a relatively attractive opportunity. To me then, it looks like Buffett’s play is a pure arbitrage play - looking to arb the difference between the price at which the banks were willing to offer financing and the fair price of that capital given the risk inherent in the purchase of Wrigely.

This could be win-win for all parties involved. Buffett gets an attractive return for financing of the deal. Mars gets Wrigley on better terms than it would have (or not at all) had it been been forced to rely on the banks for financing, and the Wrigley family and its shareholders get cash. The only quibble could be that had the banks had healthier balance sheets, Mars might have been able to get financing on slightly better terms from a bank instead of Buffett.

But all this goes to show that it’s still a buyer’s market out there for some, …those with CASH.