Cadbury buys 20% stake in Dr Pepper: Confectionery group wants closer links to extend its presence in American soft drinks market

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The Independent Online
CADBURY Schweppes, the drinks and confectionery manufacturer, yesterday signalled its intention to win a larger share of the key US soft drinks market by paying dollars 231.3m for a 20.2 per cent stake in Dr Pepper/Seven-Up.

Dominic Cadbury, chairman, said the group would like to develop closer links with Dr Pepper, which holds third place in the US market behind Coca-Cola and Pepsi.

'We see this as a successful company in the major soft drink market in the world and we want to increase our investment and stake in that very important market,' he said.

Cadbury is talking to Dr Pepper about board representation and possible future co-operation between the two companies. It has also indicated that it would be prepared to agree to a standstill on its shareholding.

Cadbury's links with Dr Pepper go back to 1986, when it paid dollars 21m for a 34.4 per cent stake. That was subsequently cut to 5.7 per cent when Dr Pepper merged with Seven-Up and staged a leveraged buyout. In exchange for the reduced holding, it was paid dollars 90m and has received a further dollars 27m from the sale of notes and redemption of preferred stock. The original cost of the investment has, however, been written off.

Dr Pepper/Seven-Up returned to the market through an initial public offering at dollars 14 a share at the start of the year.

Cadbury is acquiring its shares from The Prudential Insurance Company of America, one of the backers of the leveraged buyout, which said two weeks ago that it intended to sell its holdings. Cadbury is paying dollars 19 a share. Dr Pepper rose dollars 2 to dollars 19.12.

Cadbury's shares, which have performed poorly over the last year, closed 8p lower at 493p. Although it is seen as an excellently managed company, there is concern that it does not have a large enough international presence.

Les Pugh, a food analyst with Salomon, said he believed that a full bid for Dr Pepper was likely, eventually, and that the prospect of that, or a similar strategic move, did increase the risk of the shares.

Although Cadbury is the fourth-largest soft drinks company in the US, with brands such as Schweppes, Canada Dry, Crush and Sunkist, its 3.4 per cent market share is tiny compared with Coca-Cola and Pepsi, which together control more than 70 per cent of the market. Worldwide, however, it is third-largest and, in Britain, has a joint venture with Coca-Cola, which is the market leader. Dr Pepper's eponymous brands, together with the Seven-Up range, give it a share of about 10.6 per cent.

In 1992, it made dollars 160.6m operating profit on sales of dollars 658.7m, although interest charges on its dollars 900m debt meant it lost dollars 8.4m before tax. In the six months to June, however, it had increased that to a dollars 48.3m pre-tax profit and its operating cash flow was dollars 104.2m.

The shares being acquired by Cadbury do not yet carry voting rights and it has still to decide whether to apply to the US authorities to enfranchise them. Until then, it will treat the shareholding as an investment, which means it can only recognise dividend income in its accounts - and Dr Pepper is not yet paying dividends.

Analysts estimate that the purchase would mean Cadbury's year-end borrowings would be about 45 per cent of net assets, although its interest payments would be covered by profits more than seven times.

Dr Pepper was yesterday making presentations to analysts interested in buying the Prudential shares, but a spokesman for Dr Pepper in Dallas said it was delighted by the Cadbury purchase.

A bid for control 'would be another issue', the spokesman said. 'But we certainly don't think that is imminent. We're happy they're impressed enough with our management to pay dollars 19 a share for us.'

Wall Street analysts said Dr Pepper's management had little to fear from Cadbury's increased stake. The company was outperforming the rest of the US-based soft-drinks industry by a ratio of 2.5 to one, picking up market share from Coca-Cola and Pepsico.