Wrigley Closes Kraft Confectionery Acquisition

Published in CSP Daily News

$1.46 billion deal adds key brands, brings operational changes

CHICAGO -- The Wm. Wrigley Jr. Co. said that it has successfully completed the purchase of certain confectionery assets of Kraft Foods Global Inc. for $1.46 billion. The transaction gives Wrigley ownership of iconic brands such as Altoids, Life Savers, Creme Savers and Sugus, as well as various regional and local brands and additional production capabilities.

The purchase price will be offset in part by approximately $300 million in cash tax benefits associated with amortization of intangible assets. The net acquisition cost of $1.16 billion represents 2.4 [image-nocss] times 2004 sales. The company expects this transaction, including one-time costs, to be slightly dilutive to earnings in 2005 and slightly accretive in 2006.

Additionally, in order to best maximize the effectiveness and efficiency of Wrigley's overall production network, the company said it intends to discontinue operations at a newly acquired Kraft facility in Bridgend, Wales, and at two existing Wrigley facilitiesin Chicago and Edison, N.J.

Wrigley also plans to sell the North American marketing rights and the Iowa production facility for the Trolli brand that are included in the Kraft transaction. At the same time, Wrigley will increase investment and business activity at the company's manufacturing facilities in Gainesville, Ga., and Yorkville, Ill., as well as at its newly acquired plant in Chattanooga, Tenn.

This transaction represents a significant reinforcement of our position as a world-class confectionery company; and while we must make some very difficult manufacturing and supply-chain decisions that have significant implications for our associates, we believe these moves are necessary to best position the company to achieve our long-term strategic business goals, said Bill Wrigley Jr., chairman, president and CEO. With our confectionery expertise and focus, we look for these newly acquired brands to flourish under Wrigley's global umbrella. They have a rich heritage and are well-loved and well-known as quality brands by our customers and consumers.

Peter Hempstead, senior vice president of worldwide strategy and new business, added, These additions to the Wrigley portfolio further fuel our expansion into the broader confectionery arena, building on our internally developed mint and hard candy offerings as well as the Joyco acquisition that we completed just over a year ago.

The company said that it has assessed its longer-term supply chain needs and has identified opportunities for efficiency across its production and distribution networks, and that it plans to transfer production of Altoids over the next six to nine months from Bridgend, Wales, to North America, where nearly 90% of the brand's current sales occur today; and to seek a buyer for the North American marketing rights for the Trolli brand and the related manufacturing facility in Creston, Iowa.

Severance and other cash closing costs of approximately $15 million will be incurred as a result of the above moves and will be accounted for as part of the overall acquisition cost.

During a transition period, Wrigley will maintain a number of co-manufacturing agreements to produce certain products, including contracts with Kraft facilities in Mt. Royal, Quebec and Cobourg, Ontario.

Kraft will also be providing other transition services under contract for Wrigley, including distribution, marketing and sales support. This is being done to help ensure a smooth and seamless transition from Kraft to Wrigley for both customers and consumers. The majority of the transition support arrangements, including all licensing agreements, will conclude by the end of 2005, with the exception of the Mt. Royal co-manufacturing contract that will extend into 2008.

Over approximately the next 18 months, Wrigley will also phase out production at its Chicago chewing gum plant and its L.A. Dreyfus gum base subsidiary in Edison, N.J. Wrigley officials said they will work closely with employees in those locations and provide them support throughout the transition period.

The Chicago Sun-Times reported that the closing of the Chicago plant will result in the loss of about 600 jobs. NorthJersey.com said the closing of the Edison plant will result in the loss of about 500 jobs.

While these were hard choices to make, we believe these decisions are in the best interest of our overall business and are consistent with our long- standing philosophy of manufacturing close to our consumers and customers, said Darrell Splithoff, Senior vice president of worldwide supply chain.

During this transition, Wrigley will support associates by offering some employees the opportunity to transfer to other locations and offering others an enhanced early retirement program. For those not willing or eligible to take advantage of those offers, it will offer severance as well as outplacement services.

The addition of the Kraft confectionery plant in Chattanooga, Tenn., creates the opportunity to significantly improve supply chain efficiencies by streamlining finished product operations in North America. The Chicago plant, established in 1911, is the oldest in Wrigley's global supply chain and has production split among multiple buildings and floors. Chewing gum and ingredient operations in Chicago will be transferred to Wrigley's 11-year-old production facility in Yorkville, Ill., that has a flexible, one-story layout and more efficient access to transportation for both ingredients and finished products.

In terms of ingredient operations, Wrigley has moved towards a more regionalized approach to gum base production. For example, Wrigley has supplied gum base for the EMEAI region (primarily Europe) from its Biesheim, France, facility for decades; and gum base for the Asian region is now being produced at the Company's new plant in Shanghai, China. Likewise, Wrigley said it believes it will be more efficient to discontinue its North American gum base production at L.A. Dreyfus and shift it to the company's largest chewing gum manufacturing facility in Gainesville, Ga.

These U.S. restructuring activities will result in approximately $60 million of after-tax charges, including $25 million in noncash charges. Wrigley anticipates that somewhat less than half of the expenses will be incurred in 2005, with the balance mainly recorded in 2006. The returns generated by these actions are expected to support additional investments in the business, in order to continue to meet the company's strategic and financial objectives.

Wrigley expects the net impact of the combined supply chain moves to be a reduction of approximately 500 positions or about 3% of Wrigley's global workforce.

The company said it has identified the need for additional investments in sales and marketing support, including people, to further develop and grow these brands. And while this increased level of support will moderate margins in the short run, the company expects it to lead to greater brand vitality and growth longer term.

Wrigley has issued $1.35 billion of commercial paper to complete the deal, with the balance of the $1.46 billion purchase price funded with corporate cash. Within the next few weeks, the company intends to issue $500 million of five-year senior unsecured debt and $500 million of 10-year senior unsecured debt to replace $1 billion of the commercial paper, it said.