The deal nets Cadbury pounds 620m, which will be used to reduce debts, and marks the end of the 10-year-old Coca Cola Schweppes Beverages joint venture.
No brands are changing hands and Cadbury will continue to produce its top UK drinks, which include Dr Pepper, Schweppes mixers, Sunkist and Kia-Ora. However, the deal gives Coca Cola effective control of Cadbury's UK bottling and distribution business and continues Coca Cola's policy of concentrating its bottling arrangements among a smaller number of companies.
Cadbury Schweppes's chairman, Dominic Cadbury, said the deal would enable the company to concentrate on developing its brands without capital tied up in bottling plants. There are "no-competition" clauses in the deal, which prevent Coca Cola from manufacturing products that would compete with Cadbury's.
Mr Cadbury said Coca Cola had approached Cadbury about ending the arrangement in April. Relations between the two parties have been deteriorating in recent years as the American giant wanted to exert more control over the joint venture even though it was the minority shareholder. It is thought that Coca Cola had become uncomfortable with its bottling and distribution being handled by a company that was now a big competitor.
It is understood that Cadbury would have been uncomfortable about selling its stake to Coca Cola directly. Hence the decision by Coca Cola to sell its stake to Coca Cola Enterprises, the largest bottler and distributor of Coke in the US.
The joint venture employs 2,200 staff in five plants in Wakefield, Sidcup, East Kilbride, Milton Keynes and Edmonton as well as a nationwide network of distribution depots. Cadbury says it has received assurances from CCE that there will be no job losses.
Cadbury has also signed a 15-year franchise agreement with Coca Cola Enterprises that will secure its UK distribution and bottling arrangements. It will also be paid pounds 11m a year more for its concentrates over the next 15 years.
Cadbury's UK soft drinks business recorded a profit of pounds 110m on sales of almost pounds 1bn last year. CCSB's profits have mushroomed from just pounds 15m in 1987 to pounds 127m last year. However, the company said it felt the same level of growth could not be expected in future. Profits fell last year in spite of the warmest summer since records began. The company has found its market position threatened by increased competition, particularly from supermarket own-label drinks, and margins squeezed by a rise in raw material prices, such as packaging.
For Cadbury the deal will reduce debts from pounds 1.3bn to around pounds 700m and reduces gearing to 44 per cent. This will give the company more flexibility to pursue other acquisitions, although Mr Cadbury played down speculation that Cadbury might bid for United Biscuits, the troubled snacks and biscuits maker whose shares edged higher yesterday.
The company also stressed that the sale of its CCSB stake did not mean that it was filling its war chests for a mega-bid. Analysts say it does have a wish list of acquisitions but its targets are predominantly confectionary companies such as Lindt of Switzerland and Ritter of Germany.
Mr Cadbury said the strengthened financial position was more likely to be used for in-fill acquisitions and other investments similar to those in Russia and China where it is building major confectionery plants. Cadbury Schweppes shares were marked 17p higher to 498p yesterday.
Comment, page 17Reuse content