Thursday, November 7, 2024
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Mars, Inc. is significantly expanding its snack portfolio by acquiring Kellanova, the maker of Pringles and Cheez-It, in a substantial $36 billion all-cash deal. This acquisition, which represents the largest transaction of the year, is set to transform Mars’s already impressive snack lineup, complementing its existing chocolate-heavy portfolio with a diverse array of popular snack brands. However, the path to completing this deal is lined with complex financial arrangements and potential regulatory hurdles.

Announced on Wednesday, Mars’s decision to purchase Kellanova underscores a strategic move to bolster its snack offerings. The deal involves a considerable $29 billion bridge loan, a temporary financing arrangement secured from JPMorgan Chase and Citigroup. This loan is a significant component of the transaction, which dwarfs many of the substantial bridge loans issued in 2023. This sizable loan will eventually be replaced by a longer-term financing solution. The scale of this borrowing highlights both the magnitude of the acquisition and the current challenges in the bank-led mergers and acquisitions (M&A) financing sector.

Mars’s financial heft is a crucial factor in this ambitious acquisition. With net sales surpassing $50 billion last year, combining Mars’s revenue with Kellanova’s positions the merged entity at around $65 billion in sales. Assuming they achieve an EBITDA (earnings before interest, taxes, depreciation, and amortization) margin of 20%, a common benchmark among major snack companies, the combined entity could generate approximately $13 billion in EBITDA. This level of profitability would effectively support the debt incurred from the acquisition.

Despite the promising financial outlook, the deal’s size and the prevailing economic uncertainties—exemplified by consumer concerns voiced by firms like McDonald’s—could potentially increase financing costs. Mars has a history of navigating financial challenges effectively, as demonstrated during the 2008 financial crisis when it acquired Wrigley for $23 billion with the help of Warren Buffett’s investment in bonds and preferred stock. Today, Mars continues to leverage a broad network of both traditional and alternative lenders. Its status as a family-controlled, stable business may instill confidence among lenders, making the substantial loan more manageable.

The merger is anticipated to close in the first half of 2025, although the agreement includes a provision that allows for an extension of up to two years if antitrust reviews encounter delays. While there are currently no significant competition concerns—Mars and Kellanova together account for approximately 12% of the U.S. snacking and candy market—regulatory reviews can be lengthy. Recent high-profile cases, such as the Federal Trade Commission’s scrutiny of Tapestry and Capri’s $8.5 billion merger, underscore the possibility of extended review processes under new and evolving antitrust theories.

Despite these potential hurdles, Kellanova’s stock experienced a notable spike, reaching over $80 per share on Wednesday morning, reflecting strong market confidence in the successful completion of the deal. Mars’s offer values Kellanova at $83.50 per share, totaling $35.9 billion including net debt, which represents a 33% premium over Kellanova’s share price on August 2, before the deal was publicly disclosed.

Kellanova, which spun off from North American cereal giant WK Kellogg in 2023, is well-known for its Pringles and Cheez-It brands. Mars, which owns iconic brands such as M&M’s, Snickers, and Pedigree pet food, reported net sales exceeding $50 billion in 2023. The acquisition will further strengthen Mars’s position in the snack industry, making it a dominant player in both the sweet and savory snack segments.

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