Cadbury Schweppes breakup
The recent enouncement by Cadbury-Schweppes that it would split its confectionery operations from at least its US soft drink division comes as a reversal of its 1969 merger. In a way, it's no surprise. The company had sold off its continental European soft-drink operations in 2006 to private equity groups, and had earlier sold operations and trademarks in the UK, Ireland, New Zealand, Brazil, and some other countries to rivals PepsiCo an Coca-Cola.
The US beverage division sells such brands as 7-Up, Dr Pepper, Canada Dry, Schweppes, Snapple, and others. It is the #3 player in the US market. That business is estimated to be worth more than $13 billion. The beverage business makes up 40% of Cadbury-Schweppes assets.
The sell-off was provoked by the demands of a single stockholder. As the Financial Times puts it ("A Cadbury Classic", 3/16/07) "Nelson Peltz, a New York corporate raider renowned in the past for his playboy lifestyle, buys a stake of almost three per cent in what is now a confectionery and soft drinks giant. Just two days later the group announces plans to split its two businesses." But in truth, as the article points out, investors were already trouble by Cadbury's lackluster results, compounded by a salmonella scare in the candy business in Britain last year, followed by a recall of Easter candy based on mislabeling (some contained undocumented nuts).
It seems unlikely that Coca-Cola or PepsiCo will be buyers of the US operations, due to antitrust concerns. One thought is that the company would be spun off, either to private equity or as a new public corporation. Rumor that Kraft is interested in buying the confectionary business is strong.
It used to be the idea that diversification was a good thing, as it would help companies ride out problems in one sector if and when the other would be strong. Bit as with Sara Lee, Campbell, and many other companies, we've seen a strong push away from that strategy. It's not that diversification is a bad strategy; it can just be a bad short-term tactic. Unhappy shareholders want a return now, and breaking companies up in the current environment of deep-pocket equity funds on the prowl, shaking things up can provide a big payday.
8:16:06 PM 
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