Mergers & Acquisitions
Cadbury's Key Ingredient: Gum
The global gum market has been expanding for years, from a $16 billion industry in 2004 to $23 billion in 2008, according to global research firm Euromonitor International. Gum accounts for roughly 14% of the world's confectionery market, but its retail value is on track to rise by 4.8% this year, while chocolate and nonchocolate sugar confectioneries are growing at a slower pace, 4.1% and 3.5%, respectively.
Britain-based Cadbury currently claims almost 29% of the global gum market. That's an attractive target for Kraft Foods (KFT), which has virtually no gum business despite its acquisitions of such food giants as LU and Nabisco. Kraft placed a premium of more than 30% on Cadbury with its $16.7 billion bid for the company, which it made on Aug. 28 and announced on Sept. 7. Cadbury rebuffed the offer, saying it undervalued the Uxbridge company. Meanwhile, speculation mounts that bids could come in from Vevey (Switzerland)-based Nestlé and Hershey (HSY) of Pennsylvania. On Sept. 8, the first trading day after the news broke over the weekend, Cadbury's shares rose by 14.42, or 38%, to 51.88, while Kraft's shares fell almost 6%, by 1.65 to 26.45.
In Search of Higher Margins "Gum is definitely one of the big factors behind this deal," says Lee Linthicum, the London-based head of global food research at Euromonitor. "It's not just buying a power brand in Cadbury—there's a lot more in Cadbury's portfolio that has real potential for innovation." Indeed, in her takeover proposition to Cadbury Chairman Roger Carr, Kraft CEO Irene Rosenfeld called the possible acquisition of the British candy company "a logical next step in our transformation as we shape the company into a more global, higher-growth, and higher-margin entity."
To see what's possible, Rosenfeld need only look at privately held Mars, which got a boost from its acquisition of Chicago chewing gum maker Wm. Wrigley Jr. Co. in 2008 and now holds 35% of the global gum market with the Nos. 2 and 3 brands, Orbit and Extra. The move "definitively changed the competitive landscape for the [confectionery] market worldwide," says Linthicum. He predicted that Kraft's latest attempt will jump-start further consolidation in the confectionery market. "You need the whole package with extensive geographic reach and iconic global brand equity," he says.
Cadbury has plenty of both. Trident, which came under the company's wings after Cadbury purchased the Adams division from Pfizer in 2003, is the world's best-selling chewing gum and best-selling sugar-free gum. Cadbury, which is strong in such markets as Brazil, Mexico, Spain, and Canada, also owns the Hollywood gum brand, the best-selling candy in France, as well as Chiclets, an American icon. Halls, which also came from Adams, is the best-selling candy in Thailand. Should Kraft succeed in its bid, it could reinforce its position in the chocolate market and allow the Northfield (Ill.)-based company to expand into places where Cadbury already has a strong presence. Cadbury's Dairy Milk is the top seller in India, where four of the five best-selling candy brands are chocolate bars.
Is Vitamin Gum Next? Consumer demand for products that fit a healthier lifestyle is rising around the world, and gum has emerged as an alternative to smoking and snacking. Because it also increasingly serves as a base from which to add beneficial ingredients to become a "functional food," Linthicum says, it has more room to grow than other products such as chocolate. Companies already add functional ingredients such as tooth whiteners; artificial sweeteners like xylitol, which helps to minimize plaque and cavities; and energy stimulants. Vitamin supplements could be next.
Erin Swanson, an equity analyst at Morningstar (MORN), says that on the whole the candy business is attractive because it promises stronger growth and higher profit margins than packaged foods. That's partly because there isn't much private-label competition in candy, with those labels capturing 5% of the confection market vs. 20% on average for other packaged food types. Candy tends to be more of an impulse purchase with prime positioning in food markets, while strong consumer brand attachment aids as well.
Kraft CEO Rosenfeld has been busy the past few years "pruning" her food portfolio to shed slow-growth and low-margin products while stocking up on others, Swanson says. "Gum is one of the areas with some room for growth."