MAXJet, Eos and Silverjet set up as specialist business class operators. MAXjet began in 2003 and went bust in 2007. Eos, the name of a Greek god of the dawn, set up in 2004 and went bust last Sunday. In Greek mythology, Eos opened the gates of heaven every day. Sadly, its modern day equivalent just passed through them.

The UK’s AIM-listed Silverjet is the last one standing. For how long we wonder? It began operations in 2006 and Air crew website Cabin Managers strikes a cautious note. It is warning against applying for work there until the “financial picture improves”. Two proxies presumably serve to monitor the situation. The oil price and the share price. Oil is $117 and the shares, from a high of over £2 last March, now trade at 14.5p.

It’s shopping time for the world’s most celebrated investor and it certainly isn’t airlines. Indeed, a capitalist present at the inaugural flight of the Wright brothers would have shot them out of the sky, Warren Buffett once quipped.

But for the world’s greatest investor prices have come down, and it’s the moment to be greedy when others are fearful… especially when you’re sitting on a $40bn cash pile.

Buffett likes simple businesses he can understand. He likes globally recognised brands with staying power and significant ‘economic moats’ too. And he certainly didn’t become the business world’s equivalent of Croesus without recognising a good price when he sees one. Mars and Wrigley have ticked all the right boxes

Buffett has chipped in $4.4bn to Mars’s (think Mars bars, Snickers, Twix, M&M and more) efforts to buy chewing gum maker Wrigleys (think Spearmint, Jiucyfruit, Orbit, Hubba Bubba and more).

Mars is offering $23bn all told. Buffett will secure a 19% stake in Wrigley for a “discounted” $2.1bn reports The Times today. The combined Mars/Wrigley group will overtake Cadbury’s to become the largest sweet maker in the world with over 14% of the market from $27bn sales.

The spotlight now falls on the prospect of consolidation for other Charlies running chocolate factories. The UK’s Cadbury Schweppes is shortly to be demerged into chocolate business London-listed Cadbury plc and US-listed soft drinks maker Dr Pepper Snapple. Speculation is increasing that a deal between the newly demerged Cadbury and Hershey could finally happen following talks that came to nothing last year. Interesting to note that, from a quick scan of the numbers, Wrigley managed to make almost three times Hersheys’ net income last year on sales only 8% higher.

So in Mr Market’s eyes Hershey is worth slightly more than a third of Wrigley, yet in 2005 and 2006, we find the a rather different comparative performance. Hershey’s sales exceeded Wrigleys, and in 2006 it made more money

The Times describes Warren Buffett as the world’s richest man, with a fortune of $62bn. Though he’s not the richest in terms of family wealth, according to the latest Sunday Times rich list last week-end. India’s Mukesh and Anil Ambani (who?) sit atop an $86bn petrochemicals fortune. Top of Britain’s rich list today is another Indian family – the Mittals, with an estimated £27.7bn fortune from steel. Ten years ago the Sainsbury family topped it with a £3.3bn retailing empire. In a decade or so no doubt we’ll gawping at the world’s first trillionaire. Or maybe less given the accelerated rate at which petrodollar wealth is being amassed.

And petrodollar wealth is showing up in state managed wealth too. The world’s Sovereign Wealth funds – in good part recycled petrodollars – could exceed the US economy (est. $13.8trn) in seven years time reports the Guardian. In 2007, their collective value rose 24% to $3.5trn from an estimated $0.5trn in 1990, according to the IMF. In fact, they have been growing at 24% a year for the past three years. Says Jan Randolph, head of sovereign risk at Global Insight:

“Armed with such large amounts of debt-free cash, sovereign wealth funds are the new financial power brokers, replacing the combined financial muscle of hedge funds and private equity, and usurping central banks as the international capital providers of last resort.”

So move aside Bernanke, Trichet, King and co and here comes the new muscle with a bulging wallet.

More than 20 countries have established SWFs says the International Monetary Fund, but they sound relaxed about their growth. In the greater scheme of things, $3.5trn isn’t such a huge sum when set against the estimated value of US securities at $50trn, or the global value of traded securities at $165trn.

Regards,

Rob Mackrill
The Daily Reckoning

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Sure, he made a few deals, but nothing spectacular. Largely, while everyone else was borrowing like mad, he amassed an even bigger cash pile than he already had.

Of course, now that credit is a dirty word, and basic, non-derivative-based hard cash is suddenly worth something again, that cash pile is in demand.

And that means Mr Buffett is suddenly doing deals again…

Buffett’s hard cash buys him a half-price chunk of Wrigley

Warren Buffett is helping confectionary giant Mars to take over chewing gum group Wrigley. Mars is stumping up $80 a share, or $23bn in total, of which Mr Buffett will provide $4.4bn. The rest of the money is coming from JP Morgan and Goldman Sachs.

What does Mr Buffett get out of it? A 19% chunk of Wrigley, for the trifling sum of $2.1bn – pretty much half-price.

Chairman Bill Wrigley Jr said: “There’s no question that the financial markets are very challenging right now and coming up with the financing was a challenge.” Which is why people with deep pockets and large savings piles, like Mr Buffett, are able to command such attractive terms in return for their support.

The deal will make the combined group into the largest confectioner in the world, reports The Times, with a 14.4% market share, pushing Cadbury Schweppes into second place on 10.1%. Mr Buffett is well known for his general fondness for the sector, which he believes is about as recession-proof as you can get.

And it’s a good thing too, because he also expects that “the recession will be longer and deeper than most people think – this will not be short and shallow.”

This is a view that commentators are gradually coming round to – at least as far as the US goes. More than a few research notes predicting a U-shaped (long trough), rather than V-shaped (short and sharp, followed by a rapid recovery) recession for the US.

Many people still think however, that the UK will be just fine – not least our Chancellor, Alistair Darling. Sadly for Mr Darling, even the EU disagrees with him. The European Commission yesterday said that the UK’s economic growth would slow to 1.7% this year, at the bottom end of the Government’s forecasts for 1.75%-2.25%.

But where the Treasury sees a miraculous rebound to 2.25%-2.75% growth next year, the Europeans reckon we’ll see 1.6% growth in 2009.

I still think this is rather optimistic, but at least it’s going in the right direction. Given that Britain will be in the midst of a fully-fledged housing slump at that point, accepting reality now and making some preparation for the downturn would be a good idea.

Banks are finally accepting reality

You can’t of course, expect the government to accept reality – it would rather spin it out of existence. But the banking sector looks as if it’s being a little more realistic. Britain’s biggest mortgage lender, HBoS, as was widely flagged in the weekend press (see yesterday’s Money Morning for more: Why HBoS should jump at the chance to raise cash), has decided to go ahead with its £4bn rights issue. The group will offer to sell two new shares for every five at 275p a share, 45% below Monday’s close of 495.75p. Shareholders will have until August 7th to decide whether to take up the offer or not.

The dividend will also take a hit, unfortunately. The bank will cut its dividend payout ratio from 46% to 40%, while the interim dividend will be paid in shares. It still aims to pay the final dividend in cash.

Meanwhile, it has taken about £2.8bn in writedowns. The bank is also targeting a core Tier 1 ratio of between 6% and 7%, which would put it at the higher end of the banking sector, and also raises the game a little on RBS’s aim for 6%.

Chief executive Andy Hornby said he expects house prices to fall by “mid-single digits” both this year and next. The bank warned that it also expects bad debts to rise this year.

The move to raise money seems a wise decision. It’ll be uncomfortable for management and shareholders just now – particularly after HBoS’s indignant reaction to the recent rumour-fuelled share price collapse – but better to make a cash call now than have to do it later.

Rival banks who have dismissed the idea, such as Bradford & Bingley, may come to regret it. We’ve regularly warned readers to ignore tempting dividend yields and stay away from the banks, and we’re certainly not changing our tune yet.
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