Sweet Deal

16 March 2007



Cadbury Schweppes to Split Drinks from Candy Business

Cadbury Schweppes Plc sells Dr. Pepper soda pop and Snapple soft drinks along with Trident chewing gum and Dairy Milk chocolate bars. The company has decided to split itself with the drinks going into one business and the candy and gum going into the other. Management believes this could boost overall shareholder value by 40%. This is possible since the company’s stock has underperformed its peer group of late.

Chief Executive Todd Stitzer said earlier this week that the board had decided the split would happen, but it won’t decide whether to demerge or simply to spin off the drinks segment until June 19. “This split has been under consideration for some time and is the culmination of our strategy to maximize shareholder value,” Mr. Stitzer told MSNBC.

As of October last year, though, Mr. Stitzer said there was no plan to decouple the businesses. Since then, Nelson Peltz and his Trian Fund took a stake in the company. When he took a 5.5% stake in H.J. Heinz Co. last year, he got himself a couple of board seats and pushed through some changes that boosted the stock price. Analysts say the same thing is happening here.

According to Reuters Estimates, Cadbury is selling at just over 18 times 2007’s forecast earnings. Hershey and Wrigley are both ahead of that at 21 and 23 times forecast earnings respectively. Naturally, the forecasts are open to debate, but the Cadbury lag is clearly present in the minds of investors.

Inevitably, Wall Street has started to chatter about buyers of the spun-off or demerged businesses. Hershey and Wrigley as well as Kraft may want to buy the candy side, and could compete with one another in a bidding war that would benefit Cadbury shareholders. At the same time, private funds like Blackstone or Lion could get into play. As a plan, there appears to be no immediate downside; that could explain the 4% price rise that followed the announcement.

© Copyright 2007 by The Kensington Review, Jeff Myhre, PhD, Editor. No part of this publication may be reproduced without written consent. Produced using Fedora Linux.

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