Wrigley has a new business unit that is targeting the functional chewing gum market. I believe that they call it Wrigley Healthcare. They needed more manufacturing capacity, so they either needed to buy a plant or build one from scratch. They opted to buy Gum Tech's manufacturing business, not only because it gives them the capacity that they need, but also because they will get a quick jump start with P&G's dental gum. While I think that Gum Tech's manufacturing business would have been worth more than Wrigley's offer in the future, it has been too slow to develop because Gum Tech has had to rely on partners, namely P&G and Swedish Match, that apparently don't want to move as fast as Gum Tech. Gum Tech has excellent gum products, but insufficient capital to market them on their own, and the marketing efforts of their partners has left a lot to be desired. Here I'm referring to Breath Asure, which filed bankruptcy due to problems with their core "internal breath freshener" product, and Heritage Consumer Products, which also filed bankruptcy.
I can only speculate why Wrigley didn't offer to buy the nicotine business as well. Here is a laundry list. Take your pick. It is my belief that they didn't make an offer for the nicotine business because of a combination of these factors.
1. Wrigley wasn't interested in the non-tobacco nicotine business. They have been a confectionary company for over 100 years, and I doubt that they would take big a big step into the drug sector. Jumping into the nicotine business was probably too much for them too fast.
2. Gum Tech wasn't interested in selling it.
3. The fair value of Gum Tech's intellectual property and 49% share of the Joint Venture with Swedish Match was worth more than Wrigley wanted to spend. Keep in mind that they want Gum Tech's gum business primarily to get the manufacturing capacity. They had to compare the cost to build a plant with the cost to buy Gum Tech's capacity and contracts. Given that Wrigley valued Gum Tech's gum business excluding nicotine at about $3 per share, it is reasonable to conclude that the value of the nicotine IP and stake in the Swedish Match Joint venture is worth more than that, perhaps $4 to $6 per share is my estimate. I believe that Wrigley wanted to buy 200,000 shares of GUMM partially because it gives them a way to invest in the nicotine gum business without running it or owning the IP outright.
4. The complexity of the transaction would have increased dramatically if they had included the nicotine business due to Gum Tech's Shareholder Agreement with Swedish Match. A transaction such as that would have required Swedish Match to be involved in the negotiations, and it is possible that Swedish Match would have bid for Gum Tech to keep Wrigley out of the picture. Wrigley obviously would not want to get into a bidding war because it would have increased their cost. Why would they want to increase the complexity of the transaction if they really didn't want the nicotine business anyway?
These are my opinions on the matter. Feel free to add whatever you want.
Assuming that the Wrigley sale closes, Gum Tech will have $3.00 per share in cash, a nicotine gum business that I estimate is worth $4 to $6 per share, and 60% ownership in Gel Tech which I estimate is worth $6 to $10 per share. IMO, the stock is worth $13 to $19 today, but I'll leave my opinions as to why it isn't trading there for another post. I also think that Gel Tech will be worth a lot more than $6 to $10 per share in the future, but it too has been slow to develop primarily because the company has not started selling internationally as quickly as they indicated last year and the pharmaceutical partner that I still believe is coming isn't here yet.
Dan |
