Will Orangina flourish under its new ownership?
Nine months of exclusive talks between Pernod Ricard and soft drinks major Cadbury Schweppes finally came to an end last week when both parties agreed a $593m price for the number two French soft drink, Orangina. Sarah Diston takes a look at what this latest acquisition means for the future of Cadbury Schweppes and the brand itself.
Not so long ago experts talked of a possible de-merger of the Cadbury's confectionary and beverage business, which was fuelled even further by the sale of $1bn of its brands outside of North America to Coca-Cola. However, while it may have looked as though Cadbury was turning its back on beverages in favour of confectionary, this change in direction now appears to have been a calculated effort to expand and secure its share of the US and European soft drinks market in the long term. Orangina, with its quirky taste and instantly recognisable pear-shaped bottle, has become another piece in this increasingly impressive jigsaw.
Now sitting under Cadbury's growing umbrella of both regional and global brands, the potential for Orangina, which is still really only seen in the food service sector in US markets, is high. Cadbury Schweppes is already the third largest carbonates company in the US, behind Coca-Cola and Pepsi respectively. And, with the number of other significant deals made last year (Cadbury's has spent $2.8bn on acquisitions since 1995) the Orangina purchase (which still requires regulatory approval and includes the Pampryl and Yoo-Hoo brands) can only strengthen its position further. So it is no surprise to hear that analysts see the Orangina deal as a positive one.
Sean Mason, debt analyst for DBRS the credit rating agency, says of the acquisition: "Strategically it is a positive move for Cadbury. Certainly they are increasing the leverage of the balance sheet in the short term but Cadbury has demonstrated and I think will continue to demonstrate a very strong and a good ability to produce good free cash flow, which will be available to pay down debt.
"DBRS is comfortable with the management's current intentions and in the absence of further sizeable acquisitions, Cadbury's financial strength should remain acceptable through its global brand and geographic diversification," he adds.
By having Orangina as part of its portfolio, Cadbury's has also gained operations in continental Europe, North America and Australia - markets that Cadbury's has been concentrating its efforts on since selling off some of its brands to Coca-Cola. Furthermore, Cadbury's has been using the slowdown of the carbonates sector to acquire and improve its own US bottling and distribution network, after relying heavily on Coca-Cola's bottlers for distribution in the past. The combination of these factors means Cadbury's should now be in a position to raise Orangina's profile in the US significantly.
Cadbury's has spent £2bn on acquisitions since 1995
"When Cadbury's brought Snapple Beverages they stated that one of the main reasons for doing so was to gain greater distribution. So having got that distribution network, if they can slot Orangina into that in anyway, they are onto a winner," says David Jago of research company, Mintel International.
"Orangina is mainly distributed in the US to the food service sector, catering and the restaurant trade and it (Cadbury Schweppes) should now be able to reach out, possibly into retail. And I think the biggest thing it will do is give Cadbury Schweppes the ability to move Orangina into a much more mainstream position," he adds.
A recent DBRS statement reports there will be significant rises in goodwill and interest charges for Cadbury and DBRS says that the acquisition is not expected to contribute positively to earnings for two years.
However Jago believes this is a cautious estimate. He comments: "Two years strikes me as being a long time but I would have thought Cadbury's should be able to get it (Orangina) into retail, to market it and maybe advertise it more aggressively and really try and do something with it soon. But that depends how much they are going to spend on the marketing budget.
Orangina Light billboard campaign
Cautious or not the brand has significant long term potential. By acquiring Orangina, Cadbury's not only has a key brand, it has a product, which if handled correctly, could be diversified from its orange carbonated base.
Jago comments: "I wouldn't be surprised if at some point down the line they started to do something with Orangina. Maybe by adding flavours to it and having flavoured variants that strikes me as a really good concept being a fruit pulp product.
"It will also be interesting to see what they will do with Pampryl and whether they do much with that because it is well known in France, but is widely unknown outside the French market," he adds.
Despite the amount of scope Orangina offers and the fact the acquisition (should it proceed), will double Cadbury Schweppes carbonated and soft drinks market share in France alone - according to industry analysts more acquisitions are likely in Europe.
Britvic is up for sale and would be an ideal buy for any company wanting to benefit from an already established bottling and distribution network. Whether Britvic shareholders would be willing to sell to Cadbury's is another story, but with Orangina along with an option to buy all Pernod's other soft drinks businesses at a future date, Britvic could be seen as the icing on the cake for Cadbury.
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