Cadbury Schweppes by Marc Marin!

Situation

On October 2002 Sir John Sunderland chairman and CEO of Cadbury Schweppes have to take a

decision: considering a bid for Adams.

Adams is the number two player in worldwide gum business. Also the Halls line, leader in sugar

confectionery.

Cadbury Schweppes have to bid more than $4 billion to have any chance of winning.

External Analysis

Biggest competitors in the bid for Adams:

Nestlé

Founded in 1866. Nestlé is today a diversified food conglomerate, with total revenues of $50 billion in

2002.

Sugar confectionery is only 17% of overall confectionery for Nestlé, however they have interest in

functional foods and health-enhancing products.

Hershey

Company founded in 20th century. Hershey presented in 2001 a net sales over $4.5 billion and they had

14,400 people employed. In 2002 operating margins improved form 14% to 17%. Advertising expense in

2001 was $193.3 million.

They distributed products over 90 countries but sales outside US are not significant

Mars

Company founded in 1911 that has direct presence in 65 countries and they sell products on over 100.

48% of its $18 billion in annual sales came from confectionery. The company spent $300 million in media

for their confectionery sector in the US.

In 2002 operating margins were 15.8% global, 19.4% in US.

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Wrigley

Company founded in 1891, Wrigley is the largest manufacturer and marketer of chewing gum. They had

been gaining share in the US from competitors like Adams and Hershey. About 90% of company

revenues come from chewing gum products.

The company sell products in 150 countries with a revenues over $2 billion a year. Operating margins

improved from 20% in 1997 to 22% in 2002.

Internal Analysis

On 1969 Cadbury Schweppes was formed by the merger of the beverage company started by Jacob

Schweppes in 1763 in Geneva (Switzerland) and the chocolate business started by John Cadbury in

1824 in Birmingham (UK).

Schweppes was the 3rd competitor after Coca-Cola and PepsiCo and Cadbury was 4th in global

chocolate business.

Cadbury Schweppes is focused in beverage and confectionery brands. In confectionery the company had

made some non-chocolate acquisitions: Trebor on 1989, Bassett on 1989, Hollywood on 2000 (the first

chewing gum acquisition) and Dandy on 2002.

Also the company acquired some beverage brands, Carbonated Soft Drink (CSD) brands: Canada Dry

and Sunkist on 1986, Dr. Pepper and Seven-Up on 1995, Orangina 2001; and non CSD brands: Mott’s on

1982, Hawaiian Punch on 1999 and Snapple on 2000.

Cadbury Schweppes as a beverage company is present in North America, Europe and Australia. After

1995 with the acquisition of Dr. Pepper and Seven-Up the business had increased steadily but they had

lost market share over the previous two years, also the company remained third in US soft drink business

with 9.5%; Coca-Cola was in first position with 27.1% and PepsiCo was in second position with 26.4% of

the total volume.

Meanwhile competition launched new products, Cadbury Schweppes only launched one new product: Dr.

Pepper Fusion during the previous seven years, and analysts expected volumes to fall even more.
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As a confectionery company they covered Europe, Asia and Africa; and also Australia, Canada and

Argentina.

In the US market Cadbury Schweppes had sold the rights to its confectionery brands to Hershey in 1998.

Worldwide operating margin declined from 13% in 1998 to 12% in 2002. In US market operating margin

were 16% in 1998, projected to fall to 8% in 2002. Some analysts argued that Cadbury Schweppes had

been underinvesting in its brands and they failed to innovate.

Historically, Cadbury Schweppes had been managed as a decentralized company. In 2002 they had 98

manufacturing and bottling plants: 62 plants made confectionery and 36 bottled beverages.

Adams analysis

Company started on 1976, on 1962 Warner-Lamber, a pharmaceutical company, acquired Adams and

encouraged to develop R&D capabilities for innovative products with functional health benefits. On late

1990’s Warner-Lamber diverted resources for Adams and reduced its sales force to focus on its core

pharmaceutical business. Later, on 2000, the pharmaceutical Pfizer acquired Warner-Lambert to gain

control of its blockbuster cholesterol drug, Lipitor.

On 2002 Adams had 8 regional organizations, 5 functional departments and three gum brands: Trident

(22% of sales), Dentyne (11% of sales) and Bubbas (11% of sales) and three brands in functional

confectionery: Halls (27% of sales), Clorets (9% of sales) and Chiclets (6% of sales). Trident had the half

of global sugarfree gum sales by 2001, growing at 14% a year since 1999.

By 2002, 90% of Adams gum sales were sugarfree and operating margin fell from 19% in 1994 to 12% in

2001.

SWOT analysis

Strengths

• Cadbury Schweppes interested in Adams since 1990’s. They know a lot about the company. Deep

knowledge.

• SS Cadbury Schweppes developed a dedicated M&A team. Who planned, negotiated, and executed

deals and integration to business units.

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• Cadbury Schweppes has studied Adams since 2001: planning the integration.

• Adams identified Cadbury Schweppes as potential partner in 1997 strategic plan.

• S Pfizer wants to sell Adams.

• Adams has a sales force of 4,500 people worldwide who regularly called 1.5 million retail outlets.

• SS Adams had developed the process discipline of its pharmaceutical parent company.

• Adams had 22 production facilities in 18 countries, and they had 12,900 employees across 40 countries.

• SSS Adams is the 2nd in worldwide gum market (18.2%) and the 2nd in the US gum market (24.3%).

• SS 9 out of 10 Americans ate candy.

• Americans spent $75 on average per person per year.

• SSS Wrigley, the largest manufacturer and marketer of chewing gum, will not allowed to bid for antitrust

reasons.

Weaknesses

• Cadbury Schweppes will not be able to achieve worldwide number one position in beverage sector. This

makes that if the company wants to be the first have to look to the other side of its business.

• Increased competition in confectionery categories.

• WW Deterioring performance of some brands of Adams.

• WWW Adams is not in top-line growth momentum, and no margin improvement.

• W The idea of split Adams: Cadbury Schweppes with gum part and Nestlé with the remainder part has

rejected by Pfizer because it was too complicated.

• WWW Strong potential bidders: Nestlé, Mars, Kraft, PepsiCo and Hershey. Executives felt Cadbury

Schweppes had less than 25% change to win Adams.

• WWW Adams failed product in 2001: Body Smarts. It required a large investing. Adams spent $26

million in advertising and they developed new manufacturing methods. Adams continue had margin and

growth problems after that unsuccessful operation.

• W Adams’ share declined from 25.2% to 24.3% from 2001 to 2002.

• W Adam’s operating margin fell from 19% in 1994 to 12% in 2001.

• Wrigley, the biggest gum competitor had 20% operating margin in 2001 and between 2001 and 2002

they share of US gum market increase from 42.3% to 46.6%.

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• WWW Lack of inversion in R&D from Cadbury Schweppes side.

• Private label had a much lower share of the gum market (5% to 6%) than in chocolate and other

confectionery because of barriers developing, making and distributing gum.

• Confectionery industry spend less than 2% of sales in R&D.

• W Gum required large investments in R&D to get its function, taste, and length of flavor.

• W Consumption of some confectionery is very seasonal, up to 35% of sales.

Opportunities

• OO Cadbury Schweppes with Adams would be the worldwide leader in confectionery.

• OO Cadbury Schweppes with Adams would be worldwide 2nd place in gum producing.

• OOO Sugarfree gum sector had been growing at 7% from 1998 to 2001 (the highest growth).

• OOO Chewing gum sector has:

• High margin (20%)

• Has only one other big player: Wrigley

• Growing fast (7% annum)

• Looks attractive for its health benefits

• O Post merger Cadbury Schweppes

• 45% overall profit from confectionery (up from 35%)

• Combined Americas operation (confectionery+beverage) = 48% of sales

• Operation would increase developing market sales for confectionery from 20% to 28%

• O Strong cultural fit between Adams and Cadbury Schweppes, because Pfizer, the actual owner of

Adams, is concerned to pharmaceutical sector. On the other side Cadbury Schweppes is producing

confectionery, the same as Adams.

• OO Adams’ employees prefer Cadbury Schweppes as purchaser. They could put pressure to the

company to accept Cadbury Schweppes offer.

• OOO Adams has strong position in R&D: 155 employees in 2002. They need 24 to 36 months to bring

innovations to market.

• OO 21st century concerns about obesity. Gum sector can take advantage of it with sugarfree and low

carbohydrate gum.
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• OOO Experts see gums as a delivery method that could someday be used to deliver calcium, antacids

and other medicines.

• OO Pfizer was concurrently negotiating the $60 billion acquisition of Pharmacia. That could make they

need money to accomplish this operation.

Threats

• T Shared services between Pfizer and Adams would result in a complex transition. Adams would lose

$15 million currently obtained.

• TT Adams sugared gums have been deterioring at an average rate of 16.5%, overall market decline it

have been 6.2%

• TTT Dangerous acquisition strategy to buy weak brands that need significant investment in marketing

and promotional support to turn around.

• T Integrating a business is much more complex than initially believed.

• Little ability to create synergies. One point in common between Adams and Cadbury Schweppes is

sugar and it’s not purchased on a global free market, so it will be complicated to take advantage of this

situation.

• TT Cadbury Schweppes has never grown any business at 7% required by merger plan. How Cadbury

Schweppes explain this aggressive acquisition?

• TT Cadbury Schweppes would have to bid between $4.1 and $4.3 billion to have an opportunity to get

Adams. Analysts estimated Adams worth between $3.0 and $3.5 billion.

• TTT Company hope to fund the deal entirely with debt, which would lower its credit rating.

From Cadbury Schweppes point of view they could make this because they are strongly cash generative

and it would be more palatable to those shareholders worried about share dilution.

• Nestlé can pay more for Adams because:

• They have greater potential cost synergies

• They have more extensive market overlap with Adams

• They have greater financial firepower

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FInal decision

The interest of Cadbury Schweppes to buy Adams is to gain positions in chewing gum sector. Cadbury

Schweppes know that beverage sector is a concentrated market where PepsiCo and Coca-Cola are far

away, on the other hand confectionery sector is fragmented and with Adams the company have the

opportunity to be the main player.

Gum sector allows big margins (20%), has only one other big player, it growing fast (7% annum) and it

looks attractive for its health benefits.

With the acquisition of Adams, Cadbury Schweppes would become the world leader in confectionery and

they would achieve the second worldwide place in gum market.

In my opinion Cadbury Schweppes have to close the deal with Pfizer to buy Adams. Adams will allow

Cadbury Schweppes to gain a strong position in the chewing gum market. If Cadbury Schweppes wants

to grow as a company the only way that they can make this step is with buying a chewing gum company

because in the beverage sector they cannot compete with Coca-Cola and PepsiCo and in the other sides

of confectionery they only have experience in producing gum; other confectionery like chocolate, there is

Nestlé as a really big dominator. The deal is perfect for various reasons: first of all the companies match

perfectly together, Cadbury Schweppes had studied for a long time how the merge between the

companies would be, so they know exactly the steps to make. Also Adams return to its home because

Pfizer is a chemical company and sometimes the managing criteria differed. With the acquisition of

Adams by Cadbury, Adams will be inside a confectionery company, the same type of business.

Also Adams can show to Cadbury some good practices that Pfizer had.

Secondly, Cadbury Schweppes will gain a successful R&D department and this is the key to develop

products for the chewing gum industry. Obesity is a problem in 21st century society, so the company has

to put efforts into develop sugarfree gums. Adams sugared gums have been deterioring at an average of

16.5%, but the important product is the non sugared gums that has been growing at 7% annually;

probably sugared gums disappear in a couple of years if companies can obtain the same taste with non

sugared ones. Also Adams without the control of Pfizer could cut the time to put new products to market.

Experts see gums as delivery method, like to deliver medicines. This enforces the idea of potentiate the

R&D department.
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The fact that Adams’ employees prefer Cadbury Schweppes than other buyer for the company, can make

a difference at the end. Adams’ management would not accept a lower offer from Cadbury but in case the

buy offers are similar they can listen what the employees want.

In competitors for the bid, Nestlé cannot be a real one because the company doesn’t have any

experience in the gum industry and they control the chocolate confectionery. In my opinion if Nestlé wants

to enter in gum sector they have would make buying the first one: Wrigley. Nestlé has the financial power

commit this operation.

Other thing that can help Adams acquisition by Cadbury Schweppes is the fact that Pfizer is immersed in

negotiations to buy Pharmacia. Pfizer can cover a part of this $60 billion (price of Pharmacia) with the

amount he earn selling Adams to Cadbury Schweppes. Pfizer could prefer a quick deal with Cadbury.

Point out that the Cadbury Schweppes offer is higher than what analysts say that Adams worth.

Financing all the operation with debt I think is a risk practice, but Cadbury Schweppes can make this

because is a strongly cash generative, so it guarantee that there won’t be problems to return this debt.

Post case

Cadbury Schweppes announced on December 17, 2002 that the company has reached an agreement

with Pfizer to buy 100% of the business and assets of Adams.

Cadbury Schweppes payed $4.2 billion in cash which includes a $450 million value for expected tax

benefits and a net consideration of $3.75 billion.

The acquisition has been debt financed and is expected to earn a positive return on capital in 2006 and

enhance underlying earning in 2004.

With the acquisition, Cadbury Schweppes gain access to other big markets, such Latin America. In a

global market, after this purchase Cadbury Schweppes become the leader in confectionery and second in

gum with 26% market share.

Cadbury Schweppes expects to reach $185 million in 2006 due to performance improvements and cost

and revenue synergies with Adams businesses.