Cadbury to Spin Off Beverage Unit

Cadbury to Spin Off Beverage Unit

Credit Crunch Dashes Hopes for a Buyout By Private Equity

Cadbury Schweppes PLC said it plans to spin off its U.S. soft-drinks business as a separately traded company in the second quarter of next year, setting the timing for a decision that had been expected since the turmoil in the credit markets this summer.

Cadbury Schweppes decided against selling its drinks operations, which include Dr Pepper and 7 UP, to private-equity groups, as it had originally hoped when it said in March that it would split the company in two. Cadbury wants to separate the soft drinks from its candy business, which includes Trident gum, Cadbury Dairy Milk chocolate and Halls lozenges.

The global candy industry is fragmented and many companies are family-owned so Cadbury, the world's largest candy maker by sales, could play a role in consolidation, as either an acquirer or a target. London-based Cadbury held talks with the trust that controls Hershey Co. last month to discuss a merger, for example. Cadbury Chief Executive Todd Stitzer declined to comment Wednesday on Hershey.

Private-equity groups didn't offer as much as Cadbury had sought for its soft-drinks division because they couldn't raise funding over the summer in tightening debt markets. Analysts estimated that private equity could have paid as much as £8 billion ($16 billion).

"The debt markets have not improved and the board doesn't believe an acceptable sale price will emerge in the foreseeable future," Mr. Stitzer said in a conference call Wednesday.

"We applaud Cadbury's decision to spin off its beverage unit -- this is an irreplaceable collection of beverage brands that should command an excellent valuation as a public company," said Nelson Peltz, a founding partner of Trian Fund Management LP, which manages investment funds and accounts that own approximately 3.5% of Cadbury shares.

The new drinks company, which has yet to be named, will trade on the New York Stock Exchange. Analyst estimates for the value of the new company is between £6 billion and £7 billion. Shareholders will receive one share in the newly independent company for each share they hold in Cadbury.

Cadbury also said that the current head of the drinks business, Gil Cassagne, will retire and be succeeded by Larry Young, the head of its bottling operations.

Cadbury's shares rose 2.6% in London trading to 616 pence ($12.55). Uncertainty around the beverage division has pulled the stock down from a 52-week high of 725 pence in June.

"This is the best update given by Cadbury to the market in some time," said Andrew Wood, an analyst with Sanford Bernstein who has an "outperform" rating on the stock.

Mr. Stitzer will lead the candy company, to be called Cadbury PLC, and will need to improve its profit margin, which has lagged behind that of rivals. Investors have been pushing Cadbury management to raise its operating-profit margin, which was 10.1% last year, compared with 18.5% for Wm. Wrigley Jr. Co., according to Sanford Bernstein.