Cadbury-Schweppes resolute on drinks future
Cadbury-Schweppes has insisted that the disposal of its European soft drinks businesses is not indicative of a move away from soft drinks, but analysts see the group focusing increasingly on confectionery. Ben Cooper reports on the implications of last week's sale.
One has to feel a little sorry for the purchasers of Cadbury-Schweppes' European soft drinks operations. Having put together a €1.85bn (US2.17bn) deal to buy Cadbury Schweppes' Europe Beverages division, the consortium led by Blackstone Group International and Lion Capital LLP now finds that most attention has been focused on the ramifications the deal has for Cadbury-Schweppes, rather than the future now awaiting the brands which have been sold.
However, it is not entirely surprising that the future of Cadbury-Schweppes remains such a prime topic of discussion. The company insists that the sale of Europe Beverages should not be taken as an indication of a fading commitment to the soft drinks sector, but the fact that it has finally succeeded in a move it has been pondering since 1999 when its attempt to sell its entire European soft drinks operations to Coca-Cola was prevented by EU regulators, suggests otherwise.
This latest sale follows the disposal of its UK and Ireland soft drinks operations in 1999 to Coca-Cola, the part of the deal which was given regulatory approval. Moreover, acquisition activity over the past five years has been focused squarely in the confectionery market, including notably the group's US$4.2bn purchase of Adams from Pfizer Inc. in 2002.
It is true that the company's existing US soft drinks activities are a far more substantial operation than the continental European businesses just sold, which had been struggling to grow. In 2004, the division's sales fell by 1% to GBP653m (US$1.12bn), accounting for around 10% of Cadbury's total GBP6.74bn turnover, while operating profits fell by 2.5%. The US drinks operations constitute 45% of group profits. But the recent acquisitions and the sale of the European business suggests the focus of the company is moving towards confectionery. After this deal, confectionery will account for 66% of group sales, and it will only have soft drinks operations in the US and Australia.
So inevitably, questions are being asked about the group's long-term commitment to soft drinks. But Cadbury-Schweppes has refuted any suggestion that this is indicative of a change of direction. A company spokeswoman said: "We have a very strong number-three position (in soft drinks). It is very cash-generative. Nothing should be read into the sale of the European beverage business about future strategy." The company also said that it had "always made it very clear that the planned disposal of Europe beverages doesn't have any implications for our other beverages businesses."
This line has also been stressed publicly by Cadbury-Schweppes CEO, Todd Stitzer. Furthermore, Cadbury-Schweppes said it had no plans to change its name. It still markets brands under the Schweppes name in the US.
The fact that analysts believe the deal makes Cadbury-Schweppes a more attractive acquisition target may also have an impact on the company's future direction. The companies recently linked with a possible move have been food and confectionery groups rather than drinks groups, with both Kraft Foods Inc. and Hershey Co. mentioned as possible bidders. One would expect that a major food or confectionery group would not be buying Cadbury-Schweppes for its US soft drinks.
Cadbury-Schweppes has said it will use the proceeds of the sale to reduce the group's net debt which stood at GBP4.3bn (US$7.8bn) in June. However, Andrew Wood, European consumer goods analyst at Sanford C. Bernstein, suggested that the deal may enable the group to make some small to medium-sized acquisitions, and that he would expect these to be in confectionery rather than drinks.
Discussion of the future direction of Cadbury-Schweppes has deflected attention from the future which the new owners are mapping out for the Europe Beverages brands which include Schweppes, Orangina, TriNa, Oasis and La Casera, accounting for 75% of sales, as well as Apollinaris mineral water, Pampryl, Gini and Vida. The business, which is based in Paris and employs around 3,000 people, also has wholly-owned bottling operations in Germany, Spain, Portugal and Belgium.
France, Germany and Spain account for as much as 85% of the division's sales, though it also has sales in Britain, Africa and the Middle East. In 2004, the operation made an underlying operating profit of GBP116m on revenues of GBP653m, while volume sales of 1.7bn litres make it the third biggest player in the European carbonated soft drinks market. Nevertheless, although Cadbury-Schweppes bolstered the operation in 2000 with the acquisition of Orangina and later with the purchase of La Casera in Spain, analysts said the division still lacked critical mass.
However, Blackstone and Lion say they can now give the brands the focus and attention which they require to grow and which they were not receiving with Cadbury because they were not deemed to be core activities.
This is not an unusual stance for a company to take when acquiring a sub-division of a larger group. But Lion and Blackstone have at least one ace up their sleeve in the form of Javier Ferran, the former CEO and president of Bacardi who joined Lion earlier this year. The new owners plan to install Ferran as chairman of the European beverages operation once the deal is formerly closed. The acquisition remains subject to regulatory approval, while employee representatives also need to be consulted in a number of markets. Cadbury-Schweppes expects the deal to be completed in January.
Lyndon Lea, a founding partner in Lion Capital, said: "It will be a stand-alone business run 50-50 by Lion and Blackstone. These brands are pretty extraordinary in their markets; these are household names." Lea added that under the new ownership, investment and innovation would be stepped up while the businesses would get the "love and attention" that they had been lacking.
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