Cadbury Schweppes sets date for £5.4bn Dr Pepper demerger

Karen Attwood
Wednesday 12 March 2008 01:00

Cadbury Schweppes has agreed financing for a £5.4bn demerger of its US drinks business, easing concerns that the deal would fall through due to continuing turmoil in the credit markets.

Shares in the confectionery giant jumped by 4 per cent yesterday, up 21.5p to 561p, after Cadbury unveiled a timetable for the spin-off with the completion date set for 7 May, provided it gets shareholder approval.

Last week, a note from US broker Bear Stearns heightened fears that tighter credit markets could lead to the demerger being delayed or even derailed all together due to concerns the company would be unable to take on more debt.

But Cadbury, which has seen sales of chocolate soar on the back of its hugely successful drumming gorilla ad, announced yesterday that it had agreed debt facilities with five banks – JPMorgan Chase, Bank of America, Goldman Sachs, Morgan Stanley, and UBS Securities. Due to the uncertainty in the credit markets, Cadbury has secured definitive credit agreements from the banks instead of the usual commitment letter.

The US drinks division, which will be known as Dr Pepper Snapple Group (DPSG), will be listed on the New York Stock Exchange on 7 May. Cadbury, the maker of Dairy Milk and Trident gum, will list on the London Stock Exchange on 2 May. A shareholder meeting to agree the separation is scheduled for 11 April.

Cadbury said it expects its remaining confectionery business and DPSG to have investment-grade credit rating from Standard & Poor's. Cadbury will keep all of the debt of Cadbury Schweppes and will have net debt of £3.2bn just before the split, while DPSG's borrowing facilities will be used to pay some of that back. After the demerger, Cadbury plans to have £1.65bn of net debt, while DPSG will have net debt of £1.9bn.

Cadbury said the drinks group will not initially pay a dividend.

Investors and analysts welcomed the end to uncertainty. David Hallam, an analyst at Evolution Securities, said: "Investment-grade capital structures are in place which will enable the demerger to go ahead." Graham Jones at Panmure Gordon said that although there will be concerns about the demerger process, "we believe there will be more domestic US funds buying than UK domestic funds selling, and we see any weakness on this basis as a buying opportunity".

In February, Cadbury announced that it would not return any cash to shareholders after the demerger. The chief executive Todd Stitzer said the lack of a cash return was due to the decision to maintain both companies on investment-grade ratings. Analysts had been pencilling in a 20p-per-share payout. At the time, Mr Stitzer said the confectionery division had delivered "excellent growth" in both gum and chocolate, with underlying sales up by 7 per cent in 2007, partly due to the resurgence in Dairy Milk after the launch of its advert featuring a drumming gorilla. This went on to become the most watched advert online and sent Phil Collins's track "In the Air Tonight" to the top of the download chart.

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