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"This is a unique structure," says one source. To reiterate: The $23 billion deal is being backed by $21.1 billion of debt. The money will be used to buy Wrigley's shares at $80 apiece, which represents a 28% premium to Wrigley's stock price on April 25.
As the deal is structured, Wrigley will remain a standalone company, meaning Mars will have no responsibility for Wrigley's debt. "Mars wanted to limit its exposure," says a source, who notes that the Mars family, which has owned the confectioner since its founding in 1911, is notoriously debt averse. "A clean balance sheet is very important to them." This made structuring the debt more complex than simply loaning money to the buyer. The solution: Structure the deal like a sponsor-led leveraged buyout, where the target shoulders the debt, although Mars will still take a substantial amount of debt on its books. The transaction is being funded with $11 billion J.P. Morgan Chase & Co. provided to Mars; sources say J.P. Morgan got involved about two weeks before the deal's announcement. Wrigley, as a standalone company, will take on $5.7 billion of senior debt fromGoldman, Sachs & Co. and a further $4.4 billion of subordinated debt from Berkshire Hathaway. The company now has about $1 billion of debt on its books. Goldman's Byron Trott brought Buffett into the deal, and Buffett's role was essential. "This deal couldn't have happened without him," a source says, adding that although Goldman was capable of lending the entire amount, it was unlikely the firm would have taken on such a large commitment in today's risk-averse environment. Another adds, "It certainly helped to have [Buffett's] slug," saying the Mars family would have walked rather than take on more liability. Although details weren't available, one arb speculated that Berkshire must have given the debt at lower-than-market rates, if only to square the assumption with the fact that it's receiving $2.1 billion of equity in the deal at a discount to the $80-a-share price. As a source familiar with the deal put it, "It all evens out," in terms of the price of the debt compared with the discount on the equity. Another source disagrees. "The debt isn't cheap," the source says, but declined to compare rates with comparable high-yield debt. Assuming that the second source is correct and that Buffett was
conscious of his essential role, it would keep with his standard
operating procedure of getting as much as he can in any deal. Indeed, in 2002, amid a credit crunch caused by the collapse of the tech and telecom boom, and furthered by a recession, Buffett opened his coffers to struggling power companies such asWilliams Cos. and CenterPoint Energy Inc. But those loans came at a price. In the case of Williams, Buffett and Lehman Brothers Inc. made a one-year, $900 million loan to the utility company, which was fighting to stay out of bankruptcy, at a 30% interest rate. Williams paid off the loan in May 2003, using gains from asset sales and refinancing to return $1.17 billion to the lenders. CenterPoint got off a little easier, having to pay 12.75% on its $1.3 billion loan from Berkshire and Credit Suisse Group. Despite that history as a lender, Buffett has been an equally
opportunistic borrower. In May 2002, Buffett was able to borrow money
from banks at 3%, only 100 basis points above LIBOR at the time, and
below the 5% that Freddie Mac's five-year bonds were paying at the
time. He was able to do this by selling banks a warrant for Berkshire
stock at a 3.75% price, meaning the banks were actually paying him for
the privilege of giving him money. Maybe that's why they call Buffett
an institution. - Vipal Monga See Dealwatch: Confectioners: Mars, Wrigley, Cadbury, Hershey Categories Deal Video
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