Investment: Cadbury weighs up acquisition or payout

CADBURY SCHWEPPES, the confectionery and soft drinks group, said yesterday it is on the look-out for acquisitions but will return surplus capital to shareholders if no suitable targets can be found.

Cadbury is set to receive pounds 1.1bn from the sale of its non-US soft drinks brands to Coca-Cola - should the deal be approved by the regulatory authorities - and will dispose of pounds 500m of bottling assets.

Announcing an 11 per cent rise in underlying full-year profits to pounds 609m, John Sunderland, chief executive, said he would like to expand the group's confectionery operations with a deal but denied the company had looked at Hershey, the US chocolate giant.

"I saw the speculation but it is news to me. We have not held talks," he said.

However, analysts say a deal with Hershey would have compelling commercial logic. Cadbury Schweppes admits its balance sheet is underleveraged and one of its stated aims is to be a global player in the confectionery market.

Hershey is a huge player in the US and Canada but has little else in other markets. Cadbury, on the other hand, is dominant in Britain and has operations in Canada and emerging markets but virtually no representation in the US, the world's largest confectionery market.

Although the Hershey foundation controls a major stake in Hershey it would prove a more accessible target than Mars, the privately controlled group which is the only other major US confectionery company.

Buying anything else would make little sense as the Cadbury brand is licensed to Hershey in perpetuity in a deal only the American company can change.

A merger of the Hershey and Cadbury chocolate operations could provide a solution and the lack of a share buy-back yesterday could suggest the company is keeping its powder dry for a move later this year.

One analyst said: "They would like to expand their chocolate business but they have the same problems as Unilever, prices are just too high. If nothing changes the money will be coming back to shareholders."

That would please investors who have seen Cadbury's shares outperform the market by 48 per cent in the last two years.

Elsewhere the business has performed solidly in the face of difficult markets, particularly in Russia where Cadbury has been forced to write down the value of its assets by pounds 68m. Losses there have been held at pounds 16m although there is no sign of a recovery.

In soft drinks, Dr Pepper is outperforming the market but Seven-Up is still losing volume.

New bottling agreements should ensure the brands enjoy quality distribution, the company says.

On full year forecasts of pounds 660m Cadbury Schweppes shares - down 34.5p at 1000p - trade on a forward rating of 24, which appears well up with events.

As one analyst says: "The shares have had a good run and it is difficult to see them making much progress in the short term."

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