Posted on: Tuesday, November 16, 2004
Wrigley to pay $1.5B for candy from Kraft
By Dave Carpenter
Associated Press
CHICAGO — The world's dominant chewing-gum maker is about to get sweeter.
Looking to extend more of its marketing might from gum to candy, Wm. Wrigley Jr. announced yesterday that it has agreed to buy Life Savers and Altoids from Kraft Foods in a $1.48 billion cash deal that refocuses Kraft's attention on its trademark supermarket products.
But Altoids and Life Savers are by far the most sought-after prizes in the deal, which analysts expect to receive regulatory approval by mid-2005. Wrigley outbid Hershey Foods Corp., Mars Inc., Nestle SA and Cadbury Schweppes PLC for the Kraft sweets, which generate $490 million in annual sales.
"There are only a handful of confectionery brands around the world that have the combination of heritage and vitality that can match up with Wrigley brands," said Bill Wrigley Jr., the chairman, president and CEO of Chicago-based Wrigley. "Altoids and Life Savers are two such brands."
For Kraft, the sale offloads brands that produced just 1.6 percent of its $31 billion in revenue last year, along with $85 million in profits. According to analysts, the Northfield, Ill.-based food giant had about 4.7 percent of the U.S. confectionery market, compared with 7.8 percent for Wrigley.
"By enabling us to better focus our resources, the sale should create value for Kraft, as well as our employees, customers and shareholders," Kraft chief executive Roger K. Deromedi said.
Kraft decided recently to shed most of its confection brands, admitting that candy was one of four categories being "hammered" as a result of competitors' products and the impact of low-carb diets that forgo sweets and starchy foods.
After two years of sluggish results, the maker of Kraft cheese, Nabisco cookies, Maxwell House coffee and Oscar Mayer hot dogs also had pledged to get out of businesses that aren't part of its core strategy.
Morningstar Inc. analyst Mark Hugh Sam said Kraft's sweets division "fits better with a company like Wrigley, whose global confectionery brand portfolio carries a lot more bargaining power on the candy shelves of grocery stores. We think Kraft found out that it couldn't easily extend its grocery dominance in product categories like cheese into unrelated categories like candy."
The deal also is a big boost to Wrigley, he said, because "it continues to give credence to Bill Wrigley's vision of transforming Wrigley from a chewing-gum company into a global confectionery business."
Wrigley had been seeking a major acquisition since its proposed $12.5 billion purchase of Hershey Foods Corp. fell through at the last minute in 2002, voted down by Hershey's controlling trust.
The Kraft deal entails some acknowledged product risks, however, since Life Savers' market share has been declining and Altoids is facing much more competition than before in the mint category.
Merrill Lynch analyst Leonard Teitelbaum said Kraft didn't emphasize either product heavily, because only 40 percent of confectionery sales come from supermarkets — its power base — whereas Wrigley already markets heavily in convenience stores, drugstores and elsewhere.
"I think Wrigley has got such command of its distribution channels that ... it is going to be able to drive the heck out of these products," he said.
Bernard Pacyniak, editor in chief of Candy Industry magazine, agreed that despite challenges with mint market share, "With the right kind of marketing, I'm sure Wrigley can pump that up."
He called the acquisition "another wise move" by Wrigley after the $272 million purchase earlier this year of the Joyco gum and candy businesses, based overseas.
Wrigley said the price paid to Kraft would be partially offset by about $300 million in cash tax benefits associated with amortization of intangible assets. The net acquisition cost of $1.18 billion represents 2.4 times estimated 2004 sales.
Shares of Kraft fell 20 cents to close at $34.68 on the New York Stock Exchange, still near two-year highs. Wrigley shares, which have risen 21 percent this year through a series of all-time highs, gained 72 cents to $68.08.
The agreement also includes the Creme Savers brand, as well as Trolli gummy candies, Sugus candies and other local and regional brands in the United States, Europe, Indonesia and Thailand.
