Global Economics

Cadbury's Split Cheers Investors


The candy king announces plans to sell or spin off its North American beverages arm thanks to a push by shareholder Nelson Peltz

One thing is clear: Financier and shareholder activist Nelson Peltz gets results—or at least gets companies to act. On Mar. 13, news emerged that the billionaire had amassed a 2.98% stake in candy and beverage behemoth Cadbury Schweppes (CSG), sparking speculation that the company could be split to increase shareholder value.

Just two days later, the maker of Dairy Milk chocolate bars, Trident gum, and the iconic Cadbury Creme Egg did just that. In a statement, the London company said it plans to sell or spin out its North American beverage arm, which produces Snapple fruit drinks, Clamato juice, and 7Up and Dr Pepper.

Chief Executive Todd Stitzer had already taken steps to boost shareholder value with a four-year-old initiative that aimed to slash headcount by 10% and save £360 million ($695.6 million) by yearend. But this was to little avail. In October, Cadbury scrapped its original 2003 plan to improve operating margins by 0.5 to 0.75 percentage point annually, saying it would instead seek "growth in operating margins over time."

Tomato Tussle

Discussions about splitting the units had been under consideration for "two to three" years, the company said, although it conceded that "market speculation" in recent days "accelerated a final decision." Given Peltz's track record, once word got around that he had taken an interest in the No. 1 candy maker, few doubted changes would be on the way.

Last year, Peltz's Trian Fund Management waged a drawn-out proxy battle with U.S. ketchup titan Heinz (HNZ). Trian eventually won two seats on the board of the Pittsburgh-based company and has pressured management to boost shareholder value by cutting costs, refining its business portfolio, and stepping up marketing efforts.

Today's announcement "can only be positive for Cadbury," says Claudia Lenz, a food and beverage analyst at Bank Vontobel in Zurich. In confectionery "they have more growth potential because of their name." What's more, she adds, "Chewing gum is a fast growing market, and they are pushing into dark chocolate, which has higher margins." Cadbury also is seeing high growth rates in emerging markets such as India, Lenz says.

Gaining Elbow Room

Indeed, investors are already reaping rewards from the announced split. The stock jumped 3%, or 18 pence, to 620 pence ($12) in London. After two years of remaining largely flat, the company's shares have gained 13.5% this week. In midday New York trading, Cadbury's ADRs were up $1.11, or 2.4%, to $48.09.

Cadbury, which counts Dentyne chewing gum and Green & Black's dark organic chocolate among its blue-chip brands, says it is still considering the options for the split and will give more information as part of a trading update on June 19. Separating the two businesses will allow each to "focus on generating further revenue growth, increasing margins and enhancing returns," Stitzer said in a statement.

Who's Buying the Next Round?

Sales at the Americas beverage arm, purveyor of Hawaiian Punch, Canada Dry, Mott's, and other perennial favorites, rose 44% to £2.6 billion ($5 billion) last year as Cadbury consolidated some of its U.S. bottlers. That's about 34% of group sales of £7.4 billion ($14 billion).

What next? Analysts say a private equity buyout for the beverage unit is the most likely scenario, although Cadbury says it has received no offers so far. Another industry player would likely shy away because the growth in the beverage market is focused on sports and energy drinks, where Cadbury Schweppes has a small presence.

Buyout firms Lion Capital and Blackstone Group could consider a bid for the beverage division, which may be worth between £6.5 billion ($12.6 billion) and £8 billion ($15.5 billion), if it's put on the block, the Times of London reported. Both firms were part of a private equity consortium that purchased Cadbury's European drinks unit in 2006.

Norton is a BusinessWeek.com correspondent in London.

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