Prospects of Cadbury-Schweppes split touted

A break-up of Cadbury Schweppes was touted in the City today after the company secured greater control over the distribution of drinks such as 7 Up in the United States.

Cadbury beefed up its drinks operation across the Atlantic by buying the remaining 55% stake in Dr Pepper/Seven Up Bottling Group (BG) – the largest independent bottler in the US – that it does not already own.

The $353m (€285m) deal with private equity house Carlyle Group led analysts to say that a demerger of the drinks business from its confectionery arm was now more likely.

Cadbury, which sold the bulk of its drinks business in the UK to Coca-Cola in 1999, has worked hard to reshape its operations over the past few weeks.

It completed the sale of its European unit making Orangina and Oasis for $1.85bn to a private equity consortium in February and agreed to sell its South African drinks business Bormor for €157m earlier this month.

Graham Jones, an analyst at Panmure Gordon, said splitting confectionery from drinks could happen as soon as 2008.

“The rationale (of today’s deal) is to strengthen its route to market, simplify interaction with retailers and provide funds for investment in growth,” he said.

“However, a full integration should raise speculation of a full demerger and, in our view, today’s step makes that end-game for Cadbury more likely.”

In addition to taking full control of BG, Cadbury announced a separate deal for the assets of the All American Bottling Company (AABC), which is the third largest independent bottler in the US.

Savings from the creation of a company with revenues of $4.8bn (€3.9bn) would free up funds for further acquisitions of bottling firms, with $200m (€161m) earmarked for this purpose over the next two years.

Cadbury said today’s deal would give it more access to fast-growing products as BG owns the Deja Blue water brand and holds the licence for Big Red and Monster energy drinks.

BG has a long-term licence to sell a range of fizzy drinks in Texas, California and 22 other states in the western half of the United States covering one-third of the population.

Based in Dallas, the company owns 10 manufacturing plants and has 9,000 employees. It makes and distributes almost a quarter of Cadbury’s drinks brands in the US, which also include Sunkist and Snapple.

Todd Stitzer, chief executive of Cadbury, said: “The acquisition is strategically consistent, financially attractive and value enhancing.”

He pointed to $45m (€36.3m) of cost savings from bringing all purchasing efforts under one roof and consolidating manufacturing and back-office work.

A further $75m (€60.5m) of unnecessary expenditure could be eliminated by 2010 from bringing its selling and promotional activities into line.

This would release funds that could be spent on boosting sales of its core brands, particularly Dr Pepper.

BG had revenues of $2bn (€1.6bn) last year and earnings before interest, tax, depreciation and amortisation totalled $204m (€164.5m).

Cadbury is best known for its sweets and earlier this year overtook Mars to become the world’s biggest selling confectioner.

Its brands include Dairy Milk, Flake, Crunchie, Roses, Double Decker, Crème Egg, Halls, Trident, Trebor, Dentyne and Bassett.

The group employs more than 50,000 people around the world.