Cadbury Schweppes Soars on Peltz Stake

News that Nelson Peltz owns 62.5 million shares of the beverage and chocolate purveyor has investors wondering whether major changes are in store

Financier Nelson Peltz has a well-earned reputation as a shareholder activist, so news on Mar. 13 that the billionaire has amassed a 2.98% stake in candy and beverage giant Cadbury Schweppes (CSG) put plenty of fizz into the company's shares. The stock soared 10% amid speculation that the maker of Dairy Milk chocolate bars, Trident gum, 7Up and Dr Pepper beverages, and the beloved Cadbury Creme Egg could be split up or become a takeover target.

Last year, Peltz's Trian Fund Management waged a drawn-out proxy battle with U.S. ketchup titan Heinz (HNZ). In its bid to snag seats on the Heinz board (it eventually won two seats) Trian campaigned stridently for Heinz to increase shareholder value. The outcome? Even before the results of the proxy were announced, Heinz management announced a $265 million cost-cutting plan and a $1 billion share buyback program. The pressure is still on the Pittsburgh-based ketchup-and-pickles purveyor as it refines its business portfolio and steps up marketing expenditures.

Another Heinz?

Investors wonder whether the same thing could happen at London-based Cadbury Schweppes, whose stock has been largely flat for the last two years. The company issued a statement on Mar. 13 "in response to market speculation," confirming Peltz had acquired some 62.5 million shares. But given Peltz's reputation, it's clear the market is speculating about a lot more, analysts say.

"People see what he did at Heinz and believe that he will put more pressure on Cadbury to increase shareholder value by a possible split-up of the business," said Claudia Lenz, a food and beverage analyst at Bank Vontobel in Zurich.

It would be particularly ironic if Peltz ended up with control of Cadbury Schweppes, because his diversified holding company, Triarc (TRY), sold Snapple to Cadbury in 2000 for $1.5 billion, after having bought it three years earlier from Quaker Oats (PEP) for $300 million.

The stock jumped 10% to 602 pence in London. In midday New York trading, Cadbury's ADRs were up $4.16, or 9.8%, to $46.53.

Changing Goals

American-born Chief Executive Todd Stitzer has been seeking to boost shareholder value with his four-year-old "Fuel for Growth" initiative, which is slated to slash head count by 10% and save £360 million ($695.6 million) by the end of the year (see, 12/5/06, "A Bubbly 2007 for Cadbury Schweppes?"). But so far, that has not been enough to revitalize the maker of beverages such as Snapple, Canada Dry, Mott's, Hawaiian Punch, and Clamato, as well as storied confectionary brands including Dentyne and Hollywood gum and Cadbury chocolate bars.

In October, Cadbury scrapped its original 2003 plan to improve operating margins by 0.5 to 0.75 of a percentage point annually. It's now seeking "growth in operating margins over time" instead of a set goal.

Stitzer's efforts, and his denials that the company has received a takeover offer, also have failed to quell persistent speculation that the company is a target. Bank Vontobel's Lenz notes that rumors that a private equity firm could take over and sell the candy business or, alternatively, would shed the beverage business are "nothing new."

The rumors aren't helped, of course, when Cadbury shares (prior to today's announcement) were trading at about 15.5 times estimated 2007 earnings, compared with peers such as Groupe Danone (DA), which is at 20.5 times estimated earnings, or Nestlé, at 17 times earnings. Cadbury Schweppes did not return calls seeking comment on today's developments.

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