The major news today is of Mars Inc buying Wrigley’s for $23 billion. A 28% premium over Friday’s close. Wrigley’s basically owns the chewing gum market with 50% market share in the US as well as a strong presence internationally. Because of its gigantic moat and simple to understand business, it has been one of Buffett’s often used examples in speeches. No wonder he doesn’t mind putting up $6.3 billion in cash to help finance the deal for a minor stake in the company.
When Opportunities Arise
In a phone call with CNBC, Buffett explains his reason for helping finance the deal in current volatile times.
a good time to buy a really great business is when you can do it – Warren Buffett
What do I like about this answer? It’s just a simple, straight forward, common sense answer. He doesn’t quote the high or low price, the PE or anything regarding valuation. Watch the Wall Street analysts talk about the deal and they will start getting into arguments with one another over why the price is as it is, what’s going to happen to the other companies, who is going to get what etc etc. They start introducing so much noise into the conversation that the whole essence of “paying a fair price for a great company” is gone.
Price Check on Wrigley’s
Previously when I started listening to Buffett’s speeches and heard him talk about Wrigley’s I did a valuation and found it to be fairly priced so I didn’t bother investing in the company. Although Wrigley’s has got to be one of the most boring, stable, consistent performers, I was too cheap and walked by. I wanted excitement…
For the past 10 years, Wrigley’s FCF has grown at a rate of 14.4%. Like all companies, we’ll have to make assumptions of the future. With a sensible discount rate of 9% and keeping the growth rate as 14.4% slowed down to 5% after 10 years, the intrinsic value of Wrigley’s comes out to $69.07. Graham tells me he also agrees with an intrinsic value of $69.85. Friday’s closing price was around $62. That’s an error margin of approx 12%.
I just love predictable companies don’t you? =)
Historical Price Check on Wrigley’s
As you can see, Wrigley’s has traded at a fair price compared to its intrinsic value. Perhaps the only real opportunity would have been to buy in mid 2006, but even then, it was never a deep discount.
Congrats to Wrigley longs.
Post featured on 87th Festival of stocks at Finance Viewpoint.