Folgers purchase has added bonus for JM Smucker

JM Smucker Co's $3 billion purchase of the biggest-selling US coffee brand has a side benefit that may be even more valuable: adding Warren Buffett's Berkshire Hathaway Inc as one of its largest shareholders.

Berkshire stands to own about 1.9 percent of Smucker's stock after the Orrville, Ohio-based company, known for its namesake jams and jellies, completes its takeover of Procter & Gamble Co's Folgers coffee unit.

Buffett's insurance and investment company would have a bigger stake in Smucker than either of its co-chief executive officers: Timothy Smucker, who also serves as chairman, and his brother Richard Smucker, who fills the president's role as well.

And it wouldn't come as a shock to see Buffett, the world's richest man according to Forbes magazine, not only hang onto the 111-year-old company's shares but also buy more. Here's why:

It has happened before. Berkshire raised its stake in Gillette Co between the time that P&G agreed to buy the razor maker for stock in January 2005 and the completion of the deal that October.

The increase enabled the Omaha, Nebraska-based company to receive exactly 100 million shares of P&G, based in Cincinnati. Berkshire added to its stake in 2007 and owned 105.8 million shares of P&G as of March 31.

Smucker and Kraft Foods Co, in which Berkshire has built a 9.1 percent holding since last year, have very similar valuations. At Wednesday's closing price of $53.87, Smucker was valued at 17 times earnings, just below Kraft's 17.5 times. Both stocks had a price-to-sales ratio of 1.26 times.

When measured by book value, or the value of assets minus liabilities, Smucker is cheaper. Its ratio of 1.6 times is less than the two times for Kraft, based in Northfield, Illinois.

Buffett likes family-run companies. This was evident in Berkshire's first non-US deal, the purchase of an 80 percent stake in Israel's Iscar Metalworking Cos from the family of Eitan Wertheimer, Iscar's president.

Timothy and Richard Smucker are descendants of Jerome M. Smucker, the company's founder. Timothy's son Mark and Paul Smucker Wagstaff, a nephew of the co-CEOs, are vice presidents.

The family could use the support. Its hold on Smucker has slipped since 2000, when the company combined two classes of shares.

The 2002 purchase of P&G's Jif peanut butter and Crisco shortening units and a cash-and-stock deal two years later for International Multifoods Corp diluted its stake.

Timothy Smucker owns 1.61 million shares, which will equal a 1.4 percent stake after the company acquires Folgers. Richard Smucker owns 1.13 million shares, amounting to just 1 percent.

Smucker will effectively buy Folgers from P&G's holders, and not the company itself, under the terms of the deal. That's why Berkshire will end up with the 1.9 percent stake, amounting to 2.19 million shares.

David Wilson is a Bloomberg News columnist. The opinions expressed are his own.

(China Daily 06/06/2008 page16)