Buffett Makes His Selection

Buffett Makes His Selection
Financier Invited To Join Candy Deal By Goldman Sachs
By HEIDI N. MOOREApril 29, 2008
Mars Inc.'s planned acquisition of Wm. Wrigley Jr. & Co. carries a familiar script for Warren Buffett, who during a previous market rout said he felt like a kid in a candy store. This time, Mr. Buffett's Berkshire Hathaway Inc. has seized on opportunities in insurance, manufacturing and now is loading up on sweets.
J.P. Morgan Chase & Co., Goldman Sachs Group Inc. and Berkshire emerged largely unscathed from the credit crunch that laid low their Wall Street brethren, so their willingness to step up and fund a big deal is a good sign for the financial markets and the economy.
The $23 billion deal will create a company that will reshape the global sweets business and got done because the three strongest financial firms in the U.S. wrote the checks.
It also sends two positive signals to the market: First, bankers are willing to lend, albeit to good clients. Last month, J.P. Morgan Chief Executive James Dimon encouraged clients to seek financing. "Leveraged finance is still there; give us a call," Mr. Dimon urged.
It wasn't just talk. Mr. Dimon himself approved an approximately $11 billion loan package to longtime client Mars to help the candy maker capture Wrigley. And, the approval wasn't accompanied by a lot of hand-wringing; this one took the approval of only about five people and just five days to arrange, according to a person familiar with the deal.
J.P. Morgan's financing alone wouldn't have been enough to get the deal done: the participation of Mr. Buffett, who was invited into the deal by Goldman Sachs, was crucial. Goldman banker Byron Trott, an adviser to Wrigley and a longtime adviser to Mr. Buffett, made the connection, according to two people familiar with the deal.
Second, the financing will let buyers pay the premiums that sellers demand. Wrigley had rebuffed Mars several times because the price wasn't high enough, according to a person familiar with the deal, and Mars needed the financing. "They never would have been able to fund the deal on their own," the person said.
J.P. Morgan even agreed to loan Mars the money to do the deal without selling chunks of the financing to other firms in a syndication -- all in order to keep the deal confidential from the confectioner's rivals. (It worked: Wrigley's stock price didn't budge until the deal was announced).
The deal is also a reminder that to thrive, these banks need to lend and do deals, even if the environment is harsh and if they have their own financial issues. J.P. Morgan, for example, has $22.5 billion in unwanted leveraged loans still sitting on its balance sheet.
The other side of the equation is equally harsh. Global investment banking fees dipped to $12.2 billion in the first quarter, their lowest level since 2003, says Banc of America Securities analyst Michael Hecht.
That isn't to say anyone can get a loan. "There is no question that the financial markets are very challenging right now. Coming up with the capital, basically, to make this deal work was a challenge," said Wrigley executive chairman Bill Wrigley on a conference call.
Banks are willing to lend to established companies, with strong backing, and high credit ratings. "For the right deal, you can find the financing if you go to the right place, and you can find partners to get things done that you otherwise wouldn't," said the person familiar with the Mars deal.
In this case the structure and nature of the deal were comforting factors for the lenders. Mars, which is closely held, was pledging equity, so the lenders were higher up in the capital structure. Mars isn't going to walk away from such a strategic deal the way private-equity firms have recently.
"This is exactly the kind of business banks are pursuing now. If you can't lend to a company like this, you're closed for business," said Chris Donnelly, an analyst with Standard & Poor's Leveraged Commentary & Data, an affiliate of the debt-ratings provider.