Until recently, investor appetite for big, leveraged buyouts seemed insatiable. But suddenly, it looks as if the markets have had their fill. It's amazing the difference a couple of months makes. On July 27, candy and beverage giant Cadbury Schweppes (CSG) announced it was putting the sale of its U.S. drinks business on hold because of recent volatility in global debt markets.
As the maker of such household brands as Snapple and Dr Pepper, the London-based company's decision marks the first major delay of a sale since the credit markets started convulsing at the beginning of July. The growing uncertainty has affected private equity group Kohlberg Kravis Roberts, which failed to raise the $10 billion it needs to pay for Alliance Boots, while U.S. carmaker Chrysler (DCX) has also been forced to postpone a debt sale. Under such circumstances, analysts say delaying deals makes sense, though Cadbury insists interest in the drinks business remains strong. "[The announcement] is sensible and has become inevitable," says Rob Mann, consumer analyst at London-based stockbroker Collins Stewart (CLST). "If you sell a business in the current leveraged buyout market, you're not going to get the best price possible."
The July 27 decision is the only latest development in the long-running saga surrounding the sale of Cadbury's U.S. drinks business. Two private equity consortia, one led by the Blackstone Group (BX) and KKR, the other by Thomas H. Lee Partners and TPG, are vying for the business, which is estimated to be worth between $14 billion and $16 billion and includes established brands such as Canada Dry and 7UP. Cadbury is looking to unload the unit so it can focus on its confectionary business, which has been underperforming compared to rival Nestlé (NSRGY).
The company has also explored the idea of a demerger of its core British business (Cadbury and Schweppes tied the knot in 1969). But last month, Chief Executive Officer Todd Stitzer said a sale of the U.S. drinks business would provide better value by returning capital to shareholders. According to Collins Stewart's Mann, this still holds true as it's easier than spinning off the entire drinks operations, and it frees up more cash for shareholders and future acquisitions. "They're pretty much desperate to sell," he says.
The pressure on Cadbury to improve the bottom line comes in the wake of several scandals last year, including the recall of more than a million chocolate bars in Britain after traces of salmonella were found in some products. The stock fell 4.5% during 2006, although it has rebounded by 9% since the company announced in March that it was shopping around the U.S. drinks business. Healthy sales growth has helped offset some of the firm's woes, although Cadbury itself could still become a takeover target.
The most likely contenders are Kraft and Nestlé. Kraft Foods (KFT) recently bought Groupe Danone's (GDNNY) global biscuit business for $7.2 billion, and it has the financial firepower to bid for Cadbury's confectionary assets. Similarly, Nestleé, which lags behind in both mass-market chocolate and chewing gum, could use Cadbury's expertise in these areas to bolster its core food business.
Cadbury, however, won't go down without a fight. With an eye to improving efficiency and lowering costs, the company has announced a 15% cut in manufacturing capacity, which will lead to the loss of 7,800 jobs. At the same time, Cadbury continues to extend its presence around the globe. This year it bagged a Turkish chewing gum business for $450 million and a Japanese candy company for $114 million.
Cadbury will announce its half-year results on Aug. 1, and analysts expect the CEO to provide further details on the postponed sale then. Much will depend on how the debt markets behave over the upcoming weeks. With more volatility expected, however, raising the funds to buy the business definitely won't be as easy as taking candy from a baby.