Cadbury's de-merger of its US beverage business should increase margins for the confectionery business by 4.6 percentage points, despite an initial cost of £1bn, estimates Credit Suisse.
The research note, published yesterday by the bank, indicates that the spin off, one strategy food and beverage companies use to offload underperforming arms, can be a costly one. "Cadbury always argued that a de-merger did not create value - perhaps they were right," Credit Suisse said. The company first announced its de-merger plans on 19 June this year in order to focus on confectionery brands. Cadbury said management's goal is to leverage scale and a dominant position to maximise growth and returns. In a research note published yesterday, Credit Suisse estimated that the separation costs will amount to five per cent of the beverage business. De-merger costs will amount to £350m, while the company will still have to pay ongoing taxes on the beverage arm of £390m, the bank predicts. Cadbury will also have to create a separate beverage head office, costing about £25m per annum. However, analysts say that the move will benefit Cadbury in the long run, estimating that operating margins for the remaining confectionery arm, currently number one in the world, will increase from 9.6 per cent to 14 per cent in 2011, rising to 15.5 per cent in 2020. The business is currently worth £9.5bn, the bank said, and will experience organic growth of 5 per cent per year, fading to 3.8 per cent in 2020.
Consequently, Credit Suisse has raised the target price of shares in Cadbury Schweppes from 560p to 570p. The analysts value the beverage business at £7bn, which is currently placed in the third in the US market in terms of sales. Cadbury Schweppes is "relatively weak" in the US, the bank said, and the company doesn't have the growth opportunities in global markets enjoyed by Coke and Pepsi. Private equity interest in the beverage arm could resurface, analysts estimate, but an offer of $16bn would be needed to secure the business, $2bn higher thatn the last reported offer. The bank does not envisage any offers for the confectionery business, however, and, unlike many recent media reports, Credit Suisse feels that a merger with Hershey is only a "distant possibility". Cadbury last week filed regulatory documents outlining the de-merger proposals, after deciding against original plans to sell the US beverage arm, as debt market conditions were "unfavourable". One of the primary goals of the merger is increasing margins into the mid-teens by 2011, Cadbury said. The company plans to focus on 12 key confectionery markets, including the UK, the US, Australia, Mexico, Brazil, India, Russia and Turkey, which make up about 70 per cent of total revenues.
These markets will account for about 60 per cent of category growth over the next five years, Cadbury said. The company also identified 13 focus brands: Cadbury Dairy Milk, Trident, Halls, Dentyne, Flake, Green & Black's and the Natural Confectionery Company. Under the demerger proposals, shareowners will be issued shares in two new companies. They will hold shares in Cadbury Plc, the new holding company for the confectionery businesses to be listed on the London Stock Exchange.
They will also receive shares in CSAB Inc., a new company holding the Americas beverages business that wll be listed on the New York Stock Exchange.