Cadbury persuades Dr Pepper

John Willcock
Monday 23 January 1995 00:02

Cadbury Schweppes, the confectionery and soft drinks group, is expected to announce this week the agreed takeover of Dr Pepper, the Dallas-based drinks company. The deal is likely to be funded by a £400m rights issue.

Although Cadbury had no comment to make yesterday, sources close to the company indicate that an informal agreement has been reached between Dominic Cadbury, chairman and Pepper's chief executive, John Albers.

Dr Pepper, which merged with Seven-Up in 1988 and has about 8 per cent of the US soft drinks market, has been a long-term target of Mr Cadbury. Pepper is the third-largest player in the $48bn US market behind Coca-Cola and Pepsi.

Sources on Wall Street say that Mr Cadbury has been able to overcome the opposition of John Albers, who himself owns 3 per cent of the company, and that the deal will value Pepper at about £1.5bn.

Cadbury may well be forced to make a statement by the Stock Exchange today on the deal.

The proposed takeover will dramatically strengthen its position in the American soft drinks market, the biggest in the world. The British company already owns a quarter of Pepper, but has consistently been refused a seat on the board.

Cadbury said last year that it could pay for acquisitions of up to half-a-billion pounds without making a cash call on shareholders. According to sources it will probably raise about £400m through a rights issue to help finance the acquisition of Pepper.

Pepper's share price on Wall Street rose $1.30 to $29.50 on Friday in expectation of the deal being struck. Analysts estimate Pepper's shares would be worth up to $35 in a buyout. Cadbury's own shares stood at 401p on Friday, valuing the company at £3.3bn.

According to an investment banker quoted in Business Week magazine, a successful takeover would probably be followed by Cadbury selling off the Seven-Up operation, which accounts for 30 per cent of Dr Pepper's estimated 1994 income of $765m.

The likely buyer is Triarc, which owns Royal Crown Cola, and whose chairman and chief executive is American entrepreneur Nelson Peltz.

Pepper would benefit from the Cadbury takeover by gaining access to Cadbury's global expertise and financial resources. Pepper wants to expand internationally but only 1 per cent of its current sales are outside the US.

Pepper mainly makes soft drink concentrates that it sells to independent bottlers. It was floated on Wall Street in March 1993 following a management buyout in 1988 that left it with a considerable debt burden.

Cadbury fuelled the bid rumours when it admitted it was in active talks with Pepper last October. Cadbury's wooing of the reluctant Pepper may have been helped by the recent $1.7bn agreed acquisition by Quaker Oats of another American soft drinks company, Snapple. The deal has been described as a "takeunder" because Quaker paid 25 cents lower than the previous night's market close for Snapple's shares.

Analysts suggest the Snapple discount should ease Cadbury's negotiations with Pepper's management, which is concerned to get a reasonable price for its own 21.5 per cent stake.

Cadbury acquired its first stake in Pepper in 1986. When the American company merged with Seven-Up two years later Cadbury was left with 5.7 per cent of the new group.

In August 1993 Cadbury bought another fifth of the company for £154m, and the market started talking about a possible full bid.

Cadbury would like the deal because, although it is already the third-largest soft drinks company in the world, it still lags far behind Coca-Cola and Pepsi. The Pepper deal would be its most significant move since it merged with Schweppes a quarter of acentury ago.

Cadbury expanded its US base last year when it took over A&W, the root beer company. The pressure is on from investors for some kind of move at Cadbury - despite better 1994 trading figures than most food manufacturers, its shares fell nearly 18 per centover the year.

Investors' concerns centre on Coca-Cola Schweppes Beverages, the UK bottling operation 51 per cent-owned by Cadbury.

This has been the driving force behind the group's profits over the past few years, but the predictability and quality of these profits has deteriorated due to the much-publicised cola wars, in which supermarket chains have launched their own brands of the soft drink.

Pepper is therefore a juicy prize. Analysts say it has strong cashflow and efficient operations, and without a takeover its shares should reach $50 in a couple of years.

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