Buffett + Chocolate = Gum

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The Oracle of Omaha and Mars, the big privately-held chocolate company, will buy gum concern Wrigley (WWY) for $22 billion. The price is a 27% premium over where Wrigley traded in the last session.

On a per-share basis, Wrigley would be going for almost $80. The company’s stock has not been that high, ever. The one comparable company worth a look for valuation is Tootsie Roll (TR). It has a price-to-sales ratio of 2.6. With the premium offer for Wrigley, it will go for 4x, an unusually high valuation.

The deal is hard to fathom for other reasons. Costs savings are not really evident. The Wall Street Journal points out "A deal would expand Mars’s already considerable global reach. Wrigley generates the majority of its sales outside of the U.S."  But, each company appears to have adequate distribution networks in the US and abroad.

Wrigley has been a solid performer over the last several years with both revenue and operating income moving up. But, with the cost of commodities rising, candy company margins will probably not be what they used to be. That would seem to make Wrigley’s prospect worse and not better than they were last year.

Warren Buffett’s Berkshire Hathaway will finance much of the cost of the buy-out. He is famous for rarely being wrong about where he invests his money. But, not everything he has done has worked out.

He does own a newspaper in Buffalo, NY.

Douglas A. McIntyre