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  Separating Food Groups: A New Future for Cadbury Schweppes

Separating Food Groups A New Future for Cadbury Schweppes

By Mark Scott

Part 2: Will Kraft Want a Bite?

Another risk remains the possibility of an unsolicited takeover bid. Market-watchers believe the most likely contender would be Northfield (Ill.)-based Kraft Foods, which bought Danone's biscuit and cereal business in 2007 for $7.2 billion and has expressed interest in further international expansion. Panmure Gordon's Jones says Cadbury would help Kraft increase its presence in Europe and Asia, though any deal likely would have to wait until the company has finished digesting the Danone division.

Prospects for Dr. Pepper Snapple Group are decidedly less clear, in part because many of its brands have troubled histories. Dr. Pepper, for instance, was a pioneer in cherry-flavored cola, but now faces stiff competition from Cherry Coke, while Coca-Cola's Sprite long ago vanquished 7Up despite the latter's head start in the lemon-lime category. Then there's Snapple, which has been tossed from one corporate parent to another, but has never quite lived up to its lofty valuation.

The drinks business originally was going to be sold off to private equity investors last year, but the freeze in credit markets killed the deal. Now, as a standalone public company, it must contend with a change in customer tastes toward healthier fruit drinks. According to Citigroup, fruit-based drinks account for about one-fifth of DPSG's revenues and posted growth of 5 percent last year. By contrast, the much larger carbonated drinks group grew just 1.3 percent.

"DPSG will have to invest aggressively in its drinks business to push its existing [fruit] brands forward," says analyst Batstone-Carr of brokerage Charles Stanley. "The company isn't well-placed financially to acquire other companies, so it will have to focus on organic growth."

Caught Between Coke and Pepsi

In the fiercely competitive $106 billion US beverages market, future expansion for DPSG is no sure bet. Market leaders Coca-Cola and Pepsi also have targeted fruit-based drinks -- and enjoy larger distribution networks and deeper pockets. DPSG brands such as Nantucket Nectars and Hawaiian Punch already are feeling the squeeze, and analysts are skeptical that the business can hit its 3 percent to 5 percent annual sales growth targets.

"You can't ignore the competition from Coke and Pepsi," says Panmure Gordon's Jones. "DPSG is half their size and it could get caught in the crossfire when these bigger companies ramp up their [healthier drink] offerings."

In its nearly 40 years as a unified company, Cadbury Schweppes had ample time to prove that soda pop and candy are natural bedmates. But the marriage has ended in separation. Shareholders of the new spin-offs can only hope that the two halves of Cadbury Schweppes can find better fortunes on their own.

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