Cadbury Schweppes: What Now?

Acquisitions to satisfy changing consumer tastes and a merger may be in the cards for the candymaker, which for now can't unload its beverage division

by Mark Scott

The last year has been a roller-coaster ride for shareholders in Cadbury Schweppes (CSG), the world's largest candymaker and a leading maker of beverages. After announcing in March that it planned to sell off its U.S. drinks business, which includes big brands such as Dr. Pepper, 7Up, Snapple, Mott's, Canada Dry, and Hawaiian Punch, Cadbury was forced to postpone the deal when the credit markets imploded in July.

Cadbury's stock had climbed 33% since the start of the year, to a May high of 723.75 pence in London, on the possibility of a $15 billion private equity deal for the drinks unit. Then, when the buyout fell through (BusinessWeek.com, 7/27/07), shares plunged 30% to a low of 514 pence in August.

Finally, on Oct. 11, the maker of Dairy Milk chocolate, Creme Eggs, and Trident chewing gum threw in the towel. Instead of selling its U.S. drinks unit, Cadbury will spin it out to shareholders, creating a new, as-yet-unnamed beverages giant with annual sales of more than $5 billion. As a standalone entity, the company may be more easily sold at some point in the future if market conditions improve.

Cadbury Needs Drinks

Where does that leave the rest of Cadbury? It's a mixed picture, analysts say. The company's shares have recovered to 614 pence, but Cadbury won't realize the big cash windfall it would have gotten from selling off drinks. The rationale for the sale—advanced by shareholder activists—was that Cadbury was worth less than the sum of its parts and should be broken up to maximize shareholder value (BusinessWeek.com, 3/13/07).

Another reason for splitting up the company was to allow greater focus, respectively, on candy and drinks, which don't share much in common. The problem is, this isn't the best of times in the confectionary industry. Cadbury without beverages will face a tough market on its own.

The problem, analysts say, is that growing interest in healthy eating in North America and Western Europe is taking a bite out of the candy business (BusinessWeek.com, 10/12/07). Research firm Mintel International reckons confectionary sales in the U.S. fell 14% between 2001 and 2006, while the British market is expected to grow a mere 1% in real terms between 2007 and 2012, to $2.6 billion.

That's bad news for a company looking to cash in on sweet tooths. "The whole confectionary sector [in Western Europe and North America] is going through a hard time," says Irina Kazanthuk, an analyst for Euromonitor International in London. "No one is expecting an explosion in market performance any time soon."

Chewing on Acquisitions

There are places where candy consumption is growing faster than average, including Eastern Europe and Asia Pacific, which are posting 4% to 5% annual growth. Unfortunately for Cadbury, these are parts of the world where it has relatively limited presence. It's a second-tier player in most developing markets behind competitors Nestlé (NESN.DE) and Kraft Foods (KFT), and has yet to capitalize on its high-profile brands as newly affluent consumers gain access to candy bars and chewing gum.

One solution is to scoop up local players in emerging markets. Cadbury already has shelled out $564 million for a Turkish chewing gum business and a Japanese candy company, and has its eyes on other acquisitions, particularly in India and China.