4/29/2008

Stock Spotlight Follow Up: William Wrigley Jr. Co. (WWY)
By Brian Sozzi

Amidst the credit market rubble, there shines a financier of immense wisdom/vision, having a stockpile of cash.  Of course, the person we are referencing is the world’s richest man and legendary value investor, Berkshire Hathaway’s own Warren Buffett.  The very investment thesis that has driven outsized gains for Berkshire’s shareholder base over the years is simple to grasp; focus on corporations that have strong economic moats and easy to comprehend operations.  So on April 28, in otherwise rainy conditions on Wall Street, Mr. Buffett once again provided a ray of sunshine with the announcement that Berkshire is grabbing a 10.5% minority interest, upon the closing of the transaction, in a mega combination of global candy companies Mars. Inc. and William Wrigley Jr. Co. (ticker: WWY).  Before we outline details of the transaction, we would like to indicate that the deal makes strategic sense for both storied, family-run candy entities.  The combination, orchestrated by Mars, should do the following:

1. Provide for better negotiating leverage with large box retailers and raw material suppliers
2. Lead to stronger product pricing and operating margins through synergies
3. Usher in a wave of new confectionary products
4. Take the fight back to Cadbury and Hershey (ticker: HSY)

We get the sense that the decision to merge with Mars was difficult for Executive Chairman Bill Wrigley Jr., but one he deemed necessary to better position the Company for long-term success in an evolving marketplace.  Wrigley is steeped in rich tradition, being in business since 1891 and having strong community ties in Chicago and globally.  We believe that Mars, being in business since 1911 and still having family executives, is the perfect fit for Wrigley’s corporate culture and provides the Company with complimentary businesses that should allow the combined firm to flourish long-term.

Transaction Details

• Mars will pay $80.00 per share, or $23.0 billion, for Wrigley; the purchase price represents a 28.0% premium to the April 25 closing price.
• Bill Wrigley Jr. and CEO Pat Perez will retain their executive positions.
• Wrigley will operate as a stand alone entity within Mars.
• Mars’ Starburst and Skittles brands will be folded into Wrigley’s Lifesaver operations.
• Berkshire will purchase a minority interest for $2.1 billion upon closing.
• The deal is expected to close within 6-12 months.

WSS Updated Opinion

The deal, which was unanimously approved by Wrigley’s Board of Directors, is extremely logical, and it meaningfully compensates shareholders.  Therefore, we are downgrading our rating to HOLD based on a high probability of the deal being closed.

Previous Investment Thesis-Issued March 20, 2008

While shares of most publicly traded companies have hit the skids this year, those of consumer staples have maintained an upward bias.  One such firm that falls under this umbrella is gum manufacturer William Wrigley Jr. Co. which is about as resistant to economic downturns as could be found.

We issued an upgrade of our rating on Wrigley shares upon preliminary analysis of the 4Q`07 financials February 4, citing a potential bottom in operating margins and strong price increases enacted in 2H'07.

Having revisited our analysis, we believe a more aggressive posture is warranted given the volatility associated with many sectors of the U.S. economy and attributes of Wrigley’s business. On this basis, we are particularly optimistic on Wrigley’s earnings potential in 2H`08 as a result of price increases, new gum launches, the cycling of retail trade adjustments that hurt volume in 2007, and exposure to robust international growth trends.

Valuation relative to other packaged food companies is not cheap by any stretch of the imagination, but in our opinion the premiums are justified by Wrigley’s positioning as a best in class consumer staple enterprise.