Cadbury Plans to Separate Its Drinks and Candy Units

March 16, 2007 – Cadbury Schweppes, the British maker of Dr Pepper soft drinks and Dairy Milk chocolate, said Thursday that it planned to split off its American beverage unit from its candy businesses, following pressure from shareholders, including the billionaire Nelson Peltz.

Cadbury, which also makes 7Up, Snapple and Trident chewing gum, is the largest confectionary company in the world. A separation of the businesses would help the company focus on improving and expanding its confectionary unit, which analysts consider to be the core of the company.

Last month, Cadbury had to remove thousands of chocolate Easter eggs, including Crunchie Easter Eggs and the Dairy Milk Easter Eggs, from shelves in Britain because they had not been properly labeled as possibly containing nuts. Cadbury was forced to run ads in national newspapers warning of the possible risk to people allergic to nuts.

”It makes strategic sense because it allows a sharper focus, which would result in better business performance,” said David Lang, an analyst at Investec in London. ”But whether more value will be extracted, I don’t know.”

The American beverage unit could be worth about $:7 billion, or $13.50 billion, excluding debt, while the chocolate business may be valued around $:9 billion, analysts said. Cadbury shares rose 25 pence to 627 pence, or about $12.09, in London trading today, giving the company a market value of about $:13 billion. Cadbury depositary shares on the New York Stock Exchange, or ADRs, rose by $1, or about 2.13 percent, to $47.98.

Once separated, both businesses could fall prey to bids from rivals or private equity companies. Last year Lion Capital and the Blackstone Group, two private equity firms, bought Cadbury’s Continental European soft drinks business for 1.85 billion euros, or $2.44 billion. Shares of Cadbury have lagged those of rivals after the company suffered some setbacks at its confectionary unit. Even before the Easter egg episode, the company recalled thousands of its milk chocolate bars a year ago from supermarket shelves after some traces of salmonella were found.

John M. Sunderland, Cadbury’s chairman, said that ”now is the moment to separate” and give both management teams the opportunity to ”extract the full potential” of the businesses.

Shareholders have repeatedly asked management in recent years to consider separating the two businesses. Only six months ago the board seriously began to contemplate a split because of strong growth, bankers said.

The management, lead by Todd Stitzer, Cadbury’s chief executive officer, had been discussing the possibility over the last three weeks with its biggest shareholders. Then Mr. Peltz, the shareholder activist, announced that he had amassed a 3 percent stake in the company.

Last year, Mr. Peltz pressured H.J. Heinz’s management into selling parts of the business and other changes. Once word was out that Mr. Peltz, 64, was among Cadbury’s five largest shareholders, the stock jumped more than 10 percent. The market clearly had judged that Mr. Peltz would not remain passive.

Last year, Mr. Peltz waged a six-month battle at Heinz, demanding five board seats for his 5.5 percent stake and finally settling for two. He pushed for the sale of noncore businesses, a higher marketing budget for the ketchup brand and more share buybacks. Heinz’s shares have since risen about 25 percent.

Now, Mr. Peltz, who has made no secret of favoring a split of Cadbury, is focusing on making money with that investment. He is no stranger to the firm; in 2000, Mr. Peltz helped Cadbury expand its beverage business by selling Snapple, the fruit drink maker, to the company for $1.45 billion. Cadbury’s confectionary business is complex, making its beverage division, which generates cash, easier to sell, according to Martin Deboo, an analyst at Investec in London. Cadbury’s soft drink business has grown modestly in the United States, even as the soft drink industry overall has declined. Snapple has struggled to find a niche while its competitors have thrived. PepsiCo and Coca-Cola are not likely buyers because of antitrust issues, he said.

But John Sicher, publisher of Beverage Digest, predicted that Cadbury would eventually become its own publicly traded beverage company. He noted that, besides the soft drink business, Cadbury owned Mott’s juices, Hawaiian Punch and Nantucket Nectars.

”It has the brands and the financial power and the management to exist and compete effectively on its own,” Mr. Sicher said.

European companies are coming under increasing pressure from individual shareholders to reorganize and sell noncore assets to raise their share prices. Bernard Arnault, the French billionaire who is the chairman of LVMH Moet Hennessy Louis Vuitton, and Colony Capital, an American private equity firm, last week bought a 9.1 percent stake in Carrefour, the world’s second-largest retailer behind Wal-Mart Stores.

The purchase ignited speculation that the two investors might pressure management to change its strategy, which could include a sale of some assets. Carrefour has retained Morgan Stanley to advise it on the situation.

Cadbury said today that it would provide more details about how it would decide to split on June 19, when it would present a financial update.

The company traces its roots to 1783 when Jean Jacob Schweppe, a watchmaker and amateur scientist, perfected the process of making carbonated mineral water.

He founded the Schweppes Company in Geneva and then moved to England, where he added Schweppes tonic water to its products. Schweppes later merged with the Cadbury Group, which was founded by John Cadbury as a chocolate drink maker in 1824.