Glenboden M & A Originations

Cadbury’s new strategy precludes a mega-merger and defines future M&A moves

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Origination Status bolt-on acquisitions and non-core divestments strategy announced, June 2007
Asset confectionery businesses with leading market shares in major geographies
Buyer Cadbury-Schweppes PLC (UK), world’s largest confectionery company
Seller various
Buyer Rationale portfolio refocus into ‘pure-play’ confectionery
Seller Rationale attractive valuations
NBs group to be re-named Cadbury PLC, once Americas Beverages is divested /de-merged
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Cadbury has finally been able to announce a comprehensive new strategy, as a ‘pure-play’ confectionery business, freed from the constraints of being spread across beverages also. This strategy makes plain that the group is not interested in a major merger, with Hershey or anyone else. It also outlines a very pragmatic M&A strategy, focused on non-core divestments and acquisitions that enhance market share, or provide a major position in attractive new geographies. A spate of such deals were announced soon after the new strategy declaration, and the criteria has been set for more transactions in coming years.

The demerger plan for Americas Beverages has, as so often is such situations, caused rumours that a full break-up of Cadbury-Schweppes will follow, with suitors such as Hershey being tipped as acquirors, or at least merger partners for Cadbury’s confectionery business. However, the strategy announcement for a rejuvenated Cadbury states comprehensive and cogently that Cadbury intends to build its position, as global no. 1, independently.

In the sections on planned M&A activity, Cadbury is to divest non-core, low-growth businesses, and to acquire bolt-on companies that enhance its position in existing growth markets and categories.

Nowhere is there any mention of a group-level merger or other mega deal. Indeed, the cluster of six small deals announced by Cadbury, within a few weeks of this strategy announcement, and in national and regional markets as far apart as Australia and Romania, confirm this strategy in action.

Other evidence to suggest that Cadbury intends to retain its independence can be found in the commitment to invest in organic growth. Sure, there is a cost reduction programme, under the banner of ‘Fuel for Growth’. However, senior management also points out that confectionery innovation grew from 6% to 13% of revenues in 2003 to 2006, that investment in ‘Science and Technology’ has increased by 50%, and that 50% of the Fuel for Growth savings will be re-invested in the business.

Besides which, operating margin growth targets are not hugely ambitious. This all suggests that Cadbury is genuinely taking a longer-term approach.

Only on one level are there signs of a closer union with another confectionery major, that of materials supply. Cadbury states that it has signed a Memorandum of Understanding with Barry Callebaut, for the outsourcing of liquid chocolate production in Poland, as well as broader initiatives with them in the context of a ‘closer working relationship’ between the two companies.

Earlier this year, Hershey announced a similar long-term co-operation agreement with Callebaut. It would be easier for conflicts of interest to be avoided, and for scale economies to be maximised, if Cadbury and Hershey were to become one company. That would make an interesting case of increasing materials’ costs being a driver of consolidation activity in the food business.

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