US deal makes Cadbury world's top sweets maker

The British confectionery giant makes a return to the US market after 14-year absence with £2.7bn Adams purchase

Cadbury Schweppes became the world's biggest sweets manufacturer yesterday after it swallowed Adams, the US group behind brands such as Dentyne chewing gum and Halls cough drops, for $4.2bn (£2.7bn).

The debt-financed acquisition from Pfizer, the US pharmaceuticals giant, heralded the British group's return to the US confectionery market after a 14-year absence. It also broadened the company's global footprint, most significantly in emerging markets such as Latin America.

Analysts welcomed the move, which catapults Cadbury into the world's fastest-growing confectionery market ­ "functional products". This category, which is growing at twice the pace of traditional chocolate and sweets, spans so-called healthy products such as chewing gum that whitens your teeth, throat lozenges and breath fresheners.

Julian Hardwick, at ABN Amro, said: "Strategically, it stacks up very well for Cadbury. Adams is inherently a very attractive business. It has a strong position in the best growth sector, which is inherently high return."

Nic Sochovsky, at Merrill Lynch, added: "We consider Adams to be compelling; not only does it add to Cadbury's existing chewing gum assets, it is geographically complementary and is also sufficiently sizeable to be transforming."

But shares in Cadbury slumped 5 per cent to 388p, reflecting the full price paid by the British group as well as disappointment that the deal would not enhance earnings until 2004. The decision to debt-finance the deal prompted rating downgrades from Standard & Poor's and Moody's Investors Service. As the largest acquisition in the company's 178-year history, Adams also poses significant integration risks, analysts added.

The deal gives the British group a 9.7 per cent share of the global confectionery market, just ahead of arch rivals Mars and Nestlé, and positions it at the top of the functional market. It also pits Cadbury just behind Wrigley, the US gum giant, with 26 per cent of the world's chewing and bubble gum market. Adams' brands such as Chiclets, Clorets, Trident, Bubblicious and Bubbaloo join Cadbury's existing gum portfolio, which includes Hollywood and Stimorol. The growth in gum sales has been explosive over the past few years on the back of increasing consumer demand for products that do more than just taste good. As well as whitening teeth, Trident, a sugar-free gum launched in the Sixties, has been developed into a version that helps to re-mineralise teeth.

But the star haul, which had Cadbury fighting off the likes of Nestlé and Kraft, was Halls. Best-known in the UK for unblocking stuffy noses and soothing sore throats, Halls is more than just a medicated cough sweet. It is the world's number one sugar confectionery brand, outselling other more likely sweet shop favourites as Mentos, Twizzlers and Chupa Chups. In sunnier, less cold-germ ridden climes, Halls also sells well ­ as a "mouth refresher". The brand had global sales of nearly $700m last year.

Cadbury, which also owns Dr Pepper and 7 UP, said it would bank $185m in cost and revenue benefits by 2006. These will come from supply chain, manufacturing and distribution savings, it added, at a total cost of $150m. While, inevitably, some of Adams' nearly 12,000 employees stand to lose their jobs, Cadbury would not be drawn on its plans, insisting it was still early days. Neither would it say how many of Adams' 23 factories faced closure.

John Sunderland, Cadbury's chief executive, acknowledged that Adams remained "a bit of a mystery" to most observers. "It has been buried for decades within the bowels of two major pharmaceutical companies," he said, adding: "We welcome the confectionery orphan into the Cadbury family." Pfizer, the world's biggest drugs group, acquired Adams by default when it bought its rival Warner Lambert for $84bn. It put the candy business up for sale in June after a two-year ban on selling it expired.

While some City observers quibbled over Adams' underperformance during the past six years, Mr Sunderland said he viewed this in terms of room for growth. "We feel more excited by the opportunity than intimidated by the challenge," he said. Under the wing of Pfizer and Warner Lambert, Adams' margins languished at between 10 and 12 per cent ­ well short of the high teens margins that Mr Sunderland is targeting and the business achieved in 1994.

The purchase of Adams fulfils a long-held strategic ambition of Cadbury's. The UK maker of Dairy Milk and Flake has had the US confectioner in its sights for the past five years. It has been working on the deal for much of this year and was even given a head start by Pfizer to prepare its case for buying the company. Industry sources said lukewarm interest from Nestlé and Kraft ­ neither of which were keen to buy Adams' gum interests ­ also helped.

But Cadbury was nearly knocked off course earlier this year when quite a different chocolate trophy unexpectedly came up for grabs: the US candy icon Hershey. Although the British group, which teamed up with its Swiss rival Nestlé to make an offer, came within a whisker of success, it was trumped at the eleventh hour by the emergence of an unlikely bidder and the decision of the trust that controls Hershey to take down the "for sale" sign.

"With Hershey, Cadbury was buying a set position in a mature market with strong competition. There would have been some glory, but at the end of the day I think Adams is a better deal," an industry analyst said.

Mr Sunderland said that one of Adams' attractions was its strong distribution system, vital for getting products to far-flung corners of the globe as well as helping the chewing gum maker to hold its own in the battlefield that is the US confectionery market.

In Mexico, which together with the Caribbean contributed one-fifth of Adams' sales in 2001, sales staff make 39,000 daily calls to kiosks across the country. It is this so-called "route to market" that poses the greatest opportunity for Cadbury to leverage its vast stable of brands to new markets. Ultimately this could see Cadbury ­ barred from selling Cadbury-branded chocolates in the US under a licence agreement it has with Hershey ­ expand its share of the key North American confectionery market. Combining the groups' distribution systems is expected to provide the bulk of the $60m revenue synergies that Cadbury is targeting to achieve by 2006.

Despite the initial integration pain, which will see Cadbury fail to achieve its £300m free cash flow target next year as well as miss its earnings goal, Adams is ultimately expected to add around 1 per cent to the group's top-line growth. Given the increasing challenges posed in the fizzy drinks market, where overall growth is around 2 per cent at best and highly contested by Pepsi and Coca-Cola, this was particularly welcomed by analysts. The deal, which should not trigger any anti-trust disposals, is expected to complete next Easter.