Cadbury spilt should happen - but not yet
gains to Cadbury Schweppes, but any demerger is unlikely to take
place until at least 2006, claim analysts Goldman Sachs.
Spinning off the US soft drinks business could bring substantial gains to Cadbury Schweppes, but any demerger is unlikely to take place until at least 2006, claim analysts Goldman Sachs.
Last week a report in the Sunday Telegraph newspaper raised the possibility of an eventual sale of Cadbury's US soft drinks arm Dr Pepper/7 Up, although new CEO Todd Stitzer said that this was just one of several options being considered.
Goldman Sachs said that the demerger issue was frequently raised in the press whenever Cadbury's share price was in the doldrums - it is currently close to a 10-year low - and that speculation of this sort was nothing new.
The analysts suggested that in the immediate future, Cadbury's attention was likely to be focused on more pressing issues such as completing the integration of the Adams confectionery group and combining its three separate US businesses. This, GS said, could take until at least 2006.
But, the analysts continued, if Cadbury did decide to sell off its beverage arm, such a move could have a significant benefit for the company's share price.
"In our opinion and on the most conservative basis, there is a possible 10 per cent upside, while more realistically at least 20 per cent upside," GS said in a research report.
"However, given the high levels of debt at Cadbury at present (£4.8 billion) post the $4.2 billion Adams acquisition and the strongly cash generative nature of the US beverage operations, its demerger is an unlikely event for the time being."
GS said it estimated that the US beverage business accounted for at least 55 per cent of the company's cash flow.
The research report cautioned, however, that Cadbury Schweppes should only consider a demerger for the drinks arm if there was evidence to suggest that its share price would be permanently hampered by hanging on to the business.
But this could be a distinct possibility, the paper suggests, with GS estimating that operating profits at DPSU are likely to remain more or less static over the next few years - around $580 million in 2007 compared to $592 million in 2002.
