TORONTO -- Cott Corp. a Toronto company that makes private-label drinks for retailers such as Wal-Mart Stores Inc., is talking with private-equity firms about joining its operations with Cadbury Schweppes PLC's beverage arm, a person familiar with the talks told The Wall Street Journal.
Several private-equity firms are considering a bid for Cadbury's brands, which include Dr Pepper and 7 UP, people familiar with the situation said, according to the report. Combining the business with Cott or other small drinks companies could create a stronger, if still [image-nocss] distant No. 3, competitor to giants Coca-Cola Co. and PepsiCo Inc., it added.
Cadbury's drinks business is expected to be valued at as much as 8 billion pounds, or about $15.8 billion, when it is separated from Cadbury's candy brands this summer, the Journal said.
Ever since Cadbury laid out its plans to split the company in two last month, the talk has turned from how the businesses would look on their own to what deals each could pursue. Both the candy and drinks businesses benefit greatly from economies of scale. Hershey Co. or Wm. Wrigley Jr. Co., for example, could consider joining with Cadbury's confectionary arm once it is a standalone company, said the report.
Among the private-equity firms considering a bid for Cadbury's drinks: Blackstone Group, Kohlberg Kravis Roberts & Co. and Bain Capital LLC, as well as Lion Capital, Carlyle Group, CVC Capital Partners, Texas Pacific Group and Thomas H. Lee Partners, the Journal said.
Combining Cadbury and Cott would join the U.S.'s No. 3 and No. 4 drinks companies in a beverage industry dominated by Coke and Pepsi. Cott has a market value of about $1 billion and by some estimates could have $250 million in synergies if joined to Cadbury. The combined company would have estimated sales of nearly $8 billion and just over 20% of the U.S. carbonated-soft-drink market, according to the report.
Cott could use its strengthdelivering drinksas a launching pad to expand Cadbury's alternative beverages like Snapple iced tea and Mott's apple juice, speculated the newspaper. It delivers drinks two ways: directly to retailers, a system favored by soda brands that sell large volumes; and to warehouses for distribution to stores, a system more suited to niche brands.
While Cott is smaller than Cadbury's beverage arm, it has been undergoing changes under new president and CEO Brent Willis, who has held executive posts at Coke and Belgian brewer InBev and could be in a position to run the combined company.
Any new owners of Cadbury's drinks business could use the ample cash the brands generate to buy other noncarbonated drinks. Possible targets, said the Journal, include Hansen Natural Corp., which owns the Monster energy drink. When you look at all the pressure there is against Dr Pepper and 7 UP and you then look at the growth there is in other categories, this is the only place you want to play, Tom Pirko, president of BevMark LLC, a beverage consulting firm, told the paper.
Coke and Pepsi, with their already formidable market shares, are unlikely bidders for Cadbury beverages because of antitrust issues, beverage industry experts said. While they might be interested in individual brands such as Snapple, Cadbury is unwilling to consider breaking up its business by brand, people familiar with the matter told the paper. Cadbury did not include Coke and Pepsi among the potential buyers to whom it distributed a confidentiality agreement.
Cadbury posted strong sales-volume growth last year, surprising given that volume declines accelerated in the overall industry. It accomplished that by coming up with popular new flavors and buying bottling operations to gain leverage with supermarkets and convenience stores. Diet Dr Pepper volume rose 6.4% last year, while Diet Coke was down 0.1% and Diet Pepsi 1%, according to the Journal, citing Beverage Digest.
Meanwhile, Northfield, Ill.-based Kraft Foods Inc. may have its eye on the confectionary business of London-based Cadbury Schweppes, reported The Chicago Tribune.
Cadbury said it would continue to operate its confectionary business, while hunting for a partner such as Hershey Co. Hershey has said it is not interested in a takeover.
Cadbury's confectionery business sells cocoa powder, sugar, cough drops, chewing gum, milk chocolate bars, sugar-coated gum and breath fresheners. They are marketed under brands that include Cadbury, Bassett's, Maynard's, Halls and Dentyne.
With Kraft possibly on the hunt for a possible acquisition after gaining its independence, analyst speculation that it could be a possible Cadbury buyer is heating up, said the report. If Kraft did it right, it could be a good deal, Greggory Warren, an analyst with Morningstar Inc., told the paper.
Warren said Kraft could benefit even more if it merged its Nabisco packaged snack business with Cadbury's sales operation. Nabisco hasn't gotten as much penetration into the snack side as it should have, he said.
Kraft, the maker of Oscar Mayer hot dogs, Kraft cheese and Oreo cookies, is the world's second-largest food processor.
Though it is still at a speculative stage, Terry Bivens, an analyst with Bear, Stearns & Co., said he sees a Kraft purchase as more than just a possibility.
Bivens and John McMillan, a Prudential Equity Group analyst, dismissed the possibility that Hershey might make a bid.
A Cadbury deal not only would add to Kraft's international exposure but also further its participation in the higher growth [business], less vulnerable to private-label categories of chocolate and gum, Bivens wrote in a research report cited by the paper. That would be a huge benefit for Kraft, whose sales of staples such as cheese slices, macaroni and cheese, and cookies have suffered under an assault of cheaper private-label products, the report said.
Perry Yeatman, a Kraft spokesperson, declined to comment for the Tribune on whether Kraft is interested in Cadbury, but she confirmed that while Kraft exited its candy business two years ago when it sold its Life Savers and Altoids brands to Wm. Wrigley Jr. Co., it still operates its chocolate business, a core business.
A Kraft purchase could put intense pressure on Wrigley, which is battling a rejuvenated Cadbury gum operation, the report said.
Warren said, Cadbury is already a decent marketing machine, but then Wrigley would be looking at the possibility of a Kraft-run marketing operation. Marketing is Kraft's forte.
While Wrigley could try to outflank Kraft by bidding for Cadburyit has made no secret of its desire to get into the chocolate businessit could run afoul of antitrust regulators in the U.S. and Europe because Wrigley is the world's largest chewing gum company, said the report.Members help make our journalism possible. Become a CSP member today and unlock exclusive benefits, including unlimited access to all of our content. Sign up here.