Cadbury's chocolate-coated deal

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The Independent Online
Cadbury Schweppes's soft drinks division has hogged the headlines for the company this year. January's pounds 1.1bn deal to buy the remainder of Dr Pepper transformed the group's drinks interests and made Cadbury a credible number three in the US market behind Coca-Cola and Pepsi.

But while the soft drinks market offers the more spectacular opportunities, the confectionery division offers steady growth, too. Yesterday's pounds 108m deal to buy the Canadian business, Neilson Cadbury, underlines the group's strategy to hoist itself up the worldwide confectionery league. The top places are held by Nestle, Mars and then Philip Morris which owns Jacob Suchard. Cadbury is in the tier below along with Hershey of the US.

Cadbury may have a wish list of big targets such as Ferrero of Italy or Lindt of Switzerland. But if these prove elusive it can still put on muscle with a series of smaller deals like this one in Canada. It is growing organically by investing in younger markets such as Russia, Poland and Argentina.

Cadbury already has Canadian links through its Trebor division but with this deal it is buying back an old cast-off spruced up under different owners.

Cadbury sold its Canadian interests to Neilson in 1987 but retained a royalty agreement. It bailed out then because the market was ultra-competitive and the business was performing poorly. It is now buying back a bigger, stronger business that has Cadbury and Neilson product ranges and an improved manufacturing system with a lower cost base.

There is solid logic to this deal. In June, Cadbury acquired Allan Candy, one of Canada's biggest confectionery companies. With the Neilson business bolted on, Cadbury will be market leader in Canadian confectionery ahead of Nestle and Mars. The market is still competitive as last year's profits of pounds 5m on sales of pounds 109m testify. But there should be benefits from running the Allan Candy and Neilson businesses together.

The deal adds to Cadbury Schweppes's debt mountain which stood at pounds 1.4bn at the half-year stage in September, giving gearing of 100 per cent. Cadbury says it is using debt to pay for the deal, though a share placing cannot be ruled out.

Cadbury Schweppes shares have enjoyed strong growth this year rising by more than 50 per cent to 547p, up 0.5p yesterday.

That growth has put the shares on a forward rating of over 16, a premium to the market. But with analysts forecasting profits of pounds 525m this year and pounds 625 next year the shares are a decent hold.

Chiroscience in Medeva tie-up

Shares in the "biotech babes" had done well this year even before British Biotech's were sent soaring by last month's announcement of a potential breakthrough in the treatment of cancer. Chiroscience, a leader in so-called chiral chemistry, is no exception, but the roller-coaster nature of the sector was well-illustrated by yesterday's announcement of a co-development deal with Medeva. Having more than tripled from around 100p this year, the shares fell back 25p to 339p on the news.

The market did not have very much to go on, as neither company would even reveal which drug was involved or which side it belonged to. But the rationale behind the fall in the shares was presumably that Chiroscience is about to give something away by letting Medeva in on the act.

That looks wide of the mark. Yesterday's deal is most likely to relate to methylphenidate, Medeva's controversial treatment for hyperactivity in children, known as "attention deficit disorder" in the US. Facing the prospect of competition in 1997 from Johnson Matthey, which is developing a rival generic version of the drug, Medeva is no doubt looking to add some bells and whistles to its product, which is presumably where Chiroscience's chiral speciality comes in.

This branch of chemistry studies the ability to isolate isomers of existing drugs, making them purer and potentially less prone to causing side-effects. Applying that science to methylphenidate could allow Medeva to clean up in what could be a pounds 220m market in the US. A 10 per cent royalty on those sales would net Chiroscience potentially pounds 20m. Even if the new drug is no more than a line extension of the existing drug, it could pull in more royalties than Chiroscience's entire pounds 1.71m turnover for last year.

There should be plenty of further news flow to keep investors happy in the new year. D3967, a treatment for breast cancer, goes into clinical trials in February, when there should also be further details of the Medeva deal. But, "burning" cash at the rate of pounds 1.1m a month, Chiroscience will need to raise more money soon as its cash balances last August were only pounds 21m. Given Yamaichi's net asset value estimate of 520p a share, the company should have little difficulty raising the cash, but the shares remain speculative.

Kunick a good

recovery bet

Kunick yesterday laid to rest the joke that the 10p tokens paid out of its Bell Fruit gaming machines were a more valuable currency than the company's shares. Sent reeling by the recession, Kunick is now one of the least risky recovery plays in the leisure sector.

Profits before tax for the year to 30 September, announced yesterday, grew from pounds 7.1m to pounds 8.3m - a stark contrast to the river of red ink that flowed from the accounts three years ago. Despite the continuing impact of the National Lottery, further, solid growth is on the cards this year, with deregulation allowing fruit machines into betting shops. If everything goes to plan there will upwards of 12,000 fruit machines in bookies this time next year.

If Kunick can lay claim to 25 per cent of that market, through deals with the likes of Ladbroke, the rewards will be handsome. Analysts reckon 3,000 machines could equate to pounds 1m a year of profits.

On top of gaming, Kunick has another nice little earner in the form of a 50 per cent share in Finagest, the nursing homes business which could be floated off as early as 1997. With luck that will make up for a sharp downturn in consumer spending in France which has hit that country's operations hard.

All told, the existing businesses, a joint venture with Allied Domecq to develop 20,000 sq ft leisure complexes and a move into the management of local authority leisure facilities should see group taxable profits climb to pounds 10.5m this year.

The shares have soared 70 per cent this year to almost 24p, but still look to have a way to run. Prospective earnings per share of 1.67p give a p/e of 14.2, and a dividend of 0.7p to follow this year's 0.6p gives a gross yield of 3.7 per cent. Good value.