CBRY

What will the confectionery group do next?

by John Marshall

Sentiment toward Cadbury (CBRY) ahead of its planned trading statement on 14 October will be dominated by speculation regarding the confectionery group’s plans for its Australian beverages business. Hopes the firm could be part of a wider industry consolidation will also provide support so investors should hold on.

Although the confectionery and beverages activities are ‘integrated in Australia’ the company has already been ‘separating key commercial functions’ with a view to demerger. Finance director Ken Hanna came to Cadbury with a reputation for enjoying corporate action after he presided over the dismemberment of Dalgety, then honed his skills in private equity. Selling the Australian beverages operation would both accord with his philosophy and mean the Cadbury group could concentrate solely on confectionery.

Although the business had sales of some £400 million last year, this included the distribution rights for Red Bull. These will revert to Red Bull shortly but their loss will have only a limited impact on profits as Schweppes merely imported and then distributed Red Bull. Excluding Red Bull, turnover was some £300 million split between Schweppes and the Pepsi franchise. The inclusion of this franchise means margins are lower than in the US.

Natixis, the French based broker, has reported speculation in Australia Kirin, the Japanese food and beverages group, could be interested in buying the drinks unit. Even if no deal is announced on 14 October the market will welcome a commitment in principle, even if the final price – say £450 million – would represent less than 10% of Cadbury’s market cap.

On the issue of a possible approach for the whole group, analysts remain divided between those such as Matthew Deboo of Investec (INVP) who believe the shares are overvalued and Lehman Brothers, which has a target price of 800p and views ‘Cadbury as a target, not as a (scale) acquirer’.

Shares says: Buying a stock for a bid alone is a dangerous game but hopes for a deal will help sentiment. Hold