May 2, 2008 / 8:55 AM / 11 years ago

Cadbury starts solo against bid background

LONDON (Reuters) - Cadbury CBRY.L must improve profit margins and earnings or become a sitting duck for a bid, analysts said on Friday as the company started trading as a standalone confectionery group.

A Cadbury chocolate bar is displayed in a shop in central London June 23, 2006. REUTERS/Catherine Benson

London-based Cadbury needs to boost margins towards the level of its U.S. peers such as Hershey (HSY.N) and Wrigley or it will be too tempting a target to resist for big predators such as Kraft or even a breakup bid from Nestle, analysts added.

The demerger of Cadbury Schweppes is creating a London-listed confectionery group, Cadbury, with brands like Dairy Milk chocolate, Trident gum and Halls cough drops, and a soft drinks group Dr Pepper Snapple Group DPS.N which will start trading in New York next week on May 7.

Cadbury shares closed unchanged at 640 pence compared to a close on Thursday calculated by Reuters at 640p taking into account the spinoff of Dr Pepper. Shares in Cadbury Schweppes Plc closed on Thursday at 574-1/2p.

Deutsche Bank said with Dr Pepper shares trading at $28 each on the when-issued market, and as Cadbury shares go ex-dividend, this gave a theoretical value for the shares of 630p. Cadbury shares went ex-dividend overnight so shareholders are now not entitled to the 10.5p Cadbury Schweppes 2007 final dividend.

“The key benefit of demerger in our view is that there is now no hiding place from underperformance by Cadbury’s management. If it fails to quickly deliver a significant increase in margins and earnings we see the group as a sitting duck for a bid,” said analyst Graham Jones at Panmure Gordon.

Cadbury is targeting mid-teen percentage confectionery margins by 2011 from 9.8 percent in 2007, but this will still lag behind Hershey at around 20.5 percent and Wrigley Jr WWY.N at 18.5 percent, analysts said.

Further pressure on Cadbury will come from Mars’ $23 billion (11.7 billion pound) planned takeover of Wrigley announced earlier this week and due to be completed later this year, which will knock Cadbury off the No. 1 spot in world confectionery, they added.

This move to combine the world’s biggest chocolate maker, Mars, and the globe’s largest gum maker, Wrigley, may intensify Cadbury’s efforts to strike a merger deal with Hershey although talks broke down last year as the U.S. chocolate maker’s Hershey Trust, which has 78 percent of Hershey votes, rejected a merger.

This may leave Cadbury vulnerable to a bid from the likes of North America’s biggest food group and Suchard chocolate owner Kraft Foods KFT.N, or a consortium bid involving Nestle NESN.VX looking to gain Cadbury’s gum, analysts said.

In North America, the Dr Pepper drinks business faces a slowdown in the U.S. fizzy drinks market and stiff competition from the larger Coca-Cola Co (KO.N) and PepsiCo PEP.N, and has already warned of modestly lower underlying margins in 2008 after seeing a margin drop in 2007.

Last October, Cadbury moved to demerge Dr Pepper after activist investor Nelson Peltz pressured the group to decide to split in March 2007. A sale to private equity was abandoned in the summer of 2007 due to turmoil in the credit markets making a demerger a more attractive proposition.

In the demerger, shareholders with 100 Cadbury Schweppes shares receive 64 shares in Cadbury and 36 shares in “Cadbury Beverages” which become 12 in Dr Pepper, reflecting the estimated 64:36 value split between confectionery and beverages.

Editing by Louise Ireland/Rory Channing

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