Cadbury: Sweet Talk To Dr Pepper

Recent takeover fizz about Dr Pepper/Seven-Up (DPS) may be more than just bubbles. Rumors are flying that Cadbury Schweppes (CADBY), the British confectionery and beverage outfit, is close to striking a deal to acquire Dr Pepper. Cadbury already owns 25% of Dr Pepper. Now at 28, Dr Pepper shares are worth 35 in a buyout, say analysts.

Dr Pepper CEO John Albers has come to an informal, tentative agreement with Chairman Dominic Cadbury, says one New York investment banker. People at Cadbury have made no secret of their interest in Dr Pepper, primarily a maker of soft-drink concentrates that it sells to independent licensed bottlers. But until now, Albers and his board would have none of it. In fact, Dr Pepper adopted a poison pill to discourage a buyout, and the company's board denied Cadbury a seat.

"But recently, things have turned quite cozy between the two," says the banker. A likely part of the deal, he believes, is for Cadbury to sell off the Seven-Up operation, which accounts for 30% of Dr Pepper's estimated 1994 revenues of $765 million. The likely buyer is Triarc (TRY), parent of Royal Crown Cola, whose chairman and CEO is dealmaker Nelson Peltz.

"Dr Pepper recognizes the considerable strategic benefits of linking up with Cadbury if it hopes to become a global noncola powerhouse," says analyst Jennifer Solomon of Josephthal Lyon & Ross. She says the reasons for a merger have become very compelling for both companies: Dr Pepper needs to expand internationally, but its resources are limited. (Volume outside the U.S. accounts for only 1% of sales.) Dr Pepper currently has 8% of the U.S. market for soft drinks. "Cadbury's financial resources and its global expertise would boost Dr Pepper's growth," says Solomon.

Analyst Bill Leach at Donaldson, Lufkin & Jenrette Securities thinks there's no way that Cadbury will not buy Dr Pepper. That was the original idea when it acquired its 25% stake in the company, he adds. "The only question is when." Leach thinks part of Albers' hesitation is the knowledge that, given Dr Pepper's strong cash flow, small debt, and low-cost operations, the stock could hit 50 in two years. The big winner in a takeover would be Albers himself: He owns 3 million shares. Even at a buyout price of 35, that's a cool $105 million.

Dr Pepper declined comment.

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