Crunch time for Cadbury's

Shareholders in Cadbury are disappointed there is to be no cash return after the demerger from its American drinks business.
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The Independent Online

The drumming gorilla may have worked wonders for the Cadbury brand, boosting UK sales and spawning a hundred Facebook fan sites, but shareholders in the confectionery giant were left disappointed yesterday at the news that there will be no cash return from its demerger from its US drinks business.

Just months away from Cadbury Schweppes spinning off the beverages business, which will be listed in New York under the name Dr Pepper Snapple, its chief executive Todd Stitzer delivered the company's final set of results yesterday as a combined business and underlined his strategy for Cadbury under the strap line "fewer, faster, bigger, better".

But shares in the company fell 5 per cent after Mr Stitzer said there was "unlikely to be a return of cash to shareholders as we have decided to maintain both companies on investment-grade ratings".

Analysts expressed disappointment at the unexpected news. "While we always thought the maths of a cash return to shareholders was marginal at best, and had assumed just a 20p payout, the fact that Cadbury is going back on its previous statement is not very impressive," Graham Jones, at Panmure Gordon, said.

The management team said that due to the "turbulent conditions in the debt markets", it has decided to maintain investment grade credit ratings for both divisions and to run with current debt levels. The group revealed it had net debt outstanding of £3.2bn at the end of 2007. After the demerger, a proportion of the debt will remain with the confectionery company Cadbury, and the balance is to be repaid, the company said. Meanwhile, the newly listed drinks business will be financed with new debt and the group said it is currently working with five major banks to arrange the financing.

Its shares fell 33p to 579.5p but this followed a fortnight of gains – with Cadbury up 4 per cent last week and 5 per cent the previous week – against a wider market that was down 4 per cent.

David Hallam, an analyst at Evolution Securities, said: "While it is disappointing that there will be no return of capital following the demerger and the stock appears expensive over the short term, the focused confectionery business will see rapid earnings growth following both top-line growth and restructuring driven margin advances – towards its goal of mid-teens margins by 2011."

Certainly, Mr Stitzer was keen to point out the progress made in the confectionary business, which he said had delivered "excellent growth" in gum and chocolate. Underlying confectionery sales rose 7 per cent in 2007, which the company said was the best performance for a decade and ahead of its medium-term target of 4 to 6 per cent.

This was partly due to a recovery in UK chocolate sales after a salmonella-related recall the previous year but the resurgence in the brand is also being put down to the massive success of the drumming gorilla advertisement. It rapidly became the most watched advert online and had 91 per cent awareness with UK consumers. The ad even boosted the career of Phil Collins and sent his track "In the Air Tonight", which the gorilla intensely drums along to, into the iTunes download chart. The brainchild of Juan Cabral of advertising agency Fallon, the ad was part of a £6.2m campaign from Cadbury and stars US actor Garon Michael, who has something of a reputation as a primate having appeared as one in the films Congo, Instinct and Planet of the Apes.

As Mr Stitzer said yesterday: "For the Chinese, 2007 was the year of the pig, but for Cadbury it was the year of the gorilla."

The relaunch of the Wispa chocolate bar, which was hugely popular in the Eighties, was also a massive success, with nostalgia for childhood favourites sparking demand for the bar.

But the company must now keep the momentum going. Cadbury's latest chocolate ad, which will be on television screens within ten days, features the soul star Joss Stone singing along to the famous Flake jingle "Only the crumbliest, flakiest, chocolate...". Ad agency Fallon, which created the gorilla under the platform A Glass and a Half Full Productions, is working on a second instalment. The subject matter is currently a closely wrapped secret but will be revealed some time in March. A Cadbury spokeswoman would only say: "It is something quite unexpected but fun, which will link Cadbury in people's minds with pleasure."

But chewing gum has also been a success story for the group after Cadbury entered the market with Trident last year. The gum has enjoyed growth of 26 per cent and with product innovations, including liquid-centre-filled gum, the category has grown to take 10 per cent of UK market share, making a dent into Wrigley's dominance.

But Mr Stitzer was cautious on the US business, which saw a fall in margins in 2007 due to dilutive bottling acquisitions and a loss on the launch of its sports drink Accelerade. Revenues at the division increased 4 per cent. "Americas Beverages performed well in a tough market with its share of the carbonates market growing for the fourth year in a row," Mr Stitzer said.

Overall, underlying group pre-tax profits fell 2 per cent to £915m, below City forecasts range of £922m to £936m. Mr Stitzer said that although the economic outlook for 2008 remains uncertain, he was encouraged by good trading momentum the group has seen so far in 2008 and its cost-reduction measures, and he expects "meaningful" margin progress in 2008.

Andrew Wood, an analyst at Sanford C Bernstein in New York, said: "The turbulence of 2007 has clouded what has been a reasonably good year in terms of operating performance." He added that Cadbury has produced "very strong top-line growth above management's long-term target and quite decent margin growth in a very tough commodities environment".

Although shareholders will not see a cash return after the demerger, there was some consolation in Cadbury raising the 2007 dividend by 11 per cent to 15.5p.

The demerger is expected to complete during the second quarter of the financial year, with further details on timing due in March. Yesterday, the company announced the appointment of Roger Carr, currently the deputy chairman, as chairman of Cadbury. Mr Carr is also the chairman of Centrica and Mitchells & Butlers, and a member of the Court of Directors of the Bank of England. But M&B shareholders recently called for his scalp at its annual general meeting after losses on a failed property venture. Wayne San-ders, former president and chief executive of Kimberly-Clark, the maker of Huggies nappies, has been appointed chairman of the new drinks group.

Yesterday's announcements were unlikely to ease all the concerns of the activist investor Nelson Peltz, whose Trian Fund Management owns 4.5 per cent of shares in Cadbury. Mr Peltz has been calling for a greater return to shareholders and had been hoping that additional leverage could be added to the business. He has also described the company's mid-teens margin target for 2010 as "inadequate" and warned that if Cadbury failed to achieve "meaningful" progress on margins, his investment fund "would become more active in evaluating all of our alternatives as a large shareholder".

Chairman with an assortment of roles

Cadbury's yesterday confirmed it would appoint Roger Carr, currently the company's deputy chairman, to the post of chairman of the confectionery business following its demerger. The move, though widely trailed, raised eyebrows in the City because Mr Carr already has a portfolio of other interests likely to keep him very busy.

Not only does he also hold the chairman's post at Centrica – currently preparing to defend itself against attacks from consumer groups given the strong profits its British Gas subsidiary is expected to make – but Mr Carr is also chairman of Mitchells & Butlers, the pubs group currently considering a tie-up with Punch Taverns. In addition, he sits on the court of the Bank of England and acts as an adviser to KKR, the US private equity group.

The fact Mr Carr will soon be chairing two FTSE 100 companies – Cadbury and Centrica – contravenes corporate governance rules that no single person is likely to have enough time to do both posts justice, though the Financial Reporting Council is reviewing the provision in the Combined Code that restricts directors holding two Footsie chairmanships at the same time.

Mr Carr is also enduring a torrid time at Mitchells & Butlers, where he has faced calls to step down following the group's disastrous losses on a property transaction last year.

Earlier this month, Mr Carr was forced to tell the company's shareholders that M&B had lost more than £270m after buying loss-making derivatives contracts when it was considering spinning off its pub properties into a separate business, a move that it was eventually forced to shelve.

However, Cadbury's said yesterday that it had consulted major shareholders before announcing Mr Carr's appointment and defended the promotion. Chief executive Todd Stitzer said: "We are very confident Roger Carr has the required experience, both at Cadbury and outside of it, to lead Cadbury into the future – it was a unanimous decision that we feel comfortable with."

David Prosser

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