Cadbury Plan Attracts Partners

Cadbury Plan Attracts Partners

Potential partners for both Cadbury Schweppes PLC's candy and drinks businesses are lining up quickly, just two weeks after the company said it plans to split in two later this year, according to people familiar with the situation.

The door is open for its candy business to pursue a combination with U.S. rival Hershey Co., in a surprise reversal from 2002 when the charitable trust that controls Hershey blocked a sale of the company at the last minute. LeRoy Zimmerman, chairman of the board of the trust that has 78% of the voting rights for Hershey, said in an interview Friday: "We have a responsibility to listen to all potential possibilities that might come forward." He added, "It's important that the Hershey Trust stay focused on keeping the company competitive and profitable in this global economy."

For his part, Cadbury Chief Executive Officer Todd Stitzer, speaking to analysts in London earlier this week, said a merger with Hershey would make sense because the two companies' businesses are highly complementary.

Hershey has a market capitalization of $12.6 billion. Cadbury's confectionery business is valued at about $17 billion, analysts estimate.

Food companies are feeling pressure to consolidate to gain greater leverage when negotiating with retailers to stock their goods. A combined Hershey-Cadbury brand portfolio, which would include Cadbury's Trident and Dentyne gum as well as Hershey chocolates, would make it easier to persuade supermarkets and convenience stores to provide prime shelf space, such as next to the cash register. For years, there have been fits and starts, but the big wave of deals that was expected by many hasn't happened yet.

Meanwhile, it is looking increasingly likely that Cadbury will sell its drinks business, which includes Dr Pepper, 7 UP and Snapple, to a private-equity buyer. A number of private-equity companies have discussed their interest in the business, which is the No. 3 soft-drinks maker in the U.S., by sales, after Coca-Cola Co. and PepsiCo Inc., people familiar with the matter say. Among others, Lion Capital, Blackstone Group and Kohlberg Kravis Roberts & Co. are interested, people familiar with the matter said. Blackstone declined to comment and Lion couldn't be reached. KKR declined to comment.

Selling to a rival drinks company would slow down a deal as it would raise antitrust issues and Cadbury isn't likely to break up the drinks business and sell off individual brands, according to people familiar with the situation. Cadbury could also spin off the drinks business as a stand-alone, publicly traded company, an option it laid out two weeks ago.

Cadbury hasn't started a formal auction for its drinks business, and any deal likely won't happen until after June 19, when Cadbury has said it will provide a public update on its breakup plans, people familiar with the matter said. If it goes with private equity, a sale could take place as soon as the late summer, they added.

On the candy side, a combination of Hershey, the largest candy company in the U.S., and Cadbury, the world's biggest candy company by market share, would make sense, analysts and bankers say. The global candy market remains very fragmented, with Cadbury holding only 10%. Hershey is weak in Europe and in the developing markets -- both places where London-based Cadbury is strong. Also, the companies' management teams have a relationship because Hershey distributes Cadbury's chocolate in the U.S.

The Hershey Trust Co., trustee of the Milton Hershey School Trust, hasn't yet had contact with Cadbury, Mr. Zimmerman said. A spokesman for Hershey declined to comment. A spokeswoman for Cadbury also declined to comment.

If he attempts to join with Hershey, it would be the second go-around for Mr. Stitzer, a consummate deal maker who will be CEO of the candy company after the breakup. In 2002, the trust put Hershey on the block and Cadbury teamed up with Nestlé SA to jointly bid $10.5 billion before the trust called off the auction.

Since then, Hershey has faced a slowing chocolate market as consumers opt for healthier items. Cadbury's portfolio is heavier in such items as gum and less-fatty hard candies. Hershey's stock is down 18% from its 2005 peak.

When Cadbury bought U.S. brands Trident, Dentyne and Hall's in 2002, it became the only candy company with large shares in chocolate, sugar confectionery and gum. The move has reinvigorated the company, given that sales of gum are rising about twice the rate of chocolate globally.

Any takeover of Hershey could encounter opposition from local communities and politicians in Pennsylvania. In 2002, the potential sale caused an outcry among residents of Hershey, Pa., who worried it would endanger the Milton Hershey School for disadvantaged children, the primary beneficiary of the trust. But, Thursday, Kevin Harley, press secretary for the Pennsylvania attorney general's office, said, "We do not have the ability to intervene in the lawful business decisions of publicly traded companies such as Hershey."

Any bid for Hershey could also prompt a move from Wm. Wrigley Jr. Co., which was poised to win the company in the 2002 auction. A Hershey-Cadbury combination would be bad news for Wrigley. The Chicago company has been trying to expand beyond gum and become a broader confectionery company, similar to the Cadbury model. Wrigley declined to comment.