CADBURY SCHWEPPES

CAPTURING CONFECTIONERY

UNG PAUL MBA INSTITUTE

OUTLINE
Introduction SWOT PLC Porters Five Forces Analysis BCG Matrix

Ansoffs Matrix
Financial Ratios Recommendations

INTRODUCTION

Formed by a merger in 1969 Between a chocolate company and a beverage company. 4,960 billion of sales in 2001

Now it wants is to acquire Adams which is positioned in the gum business.

ISSUES
Should Cadbury Schweppes buy Adams for $ 4 billions? Is their strategy sound enough to create value? Do they have the necessary experienced manager to success in the integration of Adams?

SWOT (CADBURY SCHWEPPES)

3rd largest beverage company in the world

4th largest confectionary companies in the world

Wide range of products sold over 200 countries Already own two gums brand : Hollywood & Dandy Strong experience in brands acquisitions Huge manufacturing and bottling plants (98 factories)

SWOT (ADAMS)
Facilities configured to take advantage of economies of scale

Strong mind-set: Think global, act local

Pioneer in the sugar-free gums Present in more than 70 countries The leading gum brand with Trident 116 leadership positions in 33 countries

WOT (CADBURY AND ADAMS)

Both Cadbury & Adams faced, since 1999, a decrease in their operating margin Cadbury has the lowest P/E ratio of this peer group Most of Cadbury production facilities are in Europe, Americas, UK. Adams sugared gums know a deterioration higher than the market's competitors ones Adams needed 24 to 36 months to bring innovations developed in R&D to the market Factory costs are 4% higher than its competitors

SW

OT (CADBURY TO BUY ADAMS)

Take possession of the large pattern and knowledge of Adams

Reach the Latin American market thanks to the well implanted Adams products there
Take control of the sugar free gum market which has an important margin and market growth (7%)

Geographic and product range are complementary

Strong cultural fit between the two company

SWO

T (CADBURY & ADAMS)

Both face really strong competitors

Inherent risk in the acquisition of a company with huge financial targets to justify the price
Potential risk of failure in the bid (25% chance to win) Adams Brazil had gone from a high margin to a break-even operation Cadbury might not have anyone to represent Adams Bid is overvalued If they lose the bid possibility of being destroyed by the leader-to-come

Capital cost is higher for gums (6-7% of revenue) than for chocolate (3-4%)

PLC CURVE

Adams' free sugar gum

Adams' sugar gum

PORTERS FIVE FORCES (ADAMS)

RIVALRY AMONG COMPETITION
- Low switching cost - Wrigley strong leader

- Fragmented market

HIGH PRESSURE

PORTERS FIVE FORCES (ADAMS)

THREAT OF NEW ENTRANTS

- Necessary knowledge and experience

- Expenses in R&D are high - Cost of entry is high ( Production facility cost $120M ) - Gum is High margin

MEDIUM PRESSURE

PORTERS FIVE FORCES (ADAMS)

THREAT OF SUBSTITUTES

- Wide range of product such as candy, chocolate

- But not real substitute

LOW PRESSURE

PORTERS FIVE FORCES (ADAMS)

Bargaining power of suppliers - Sugar is not a standard commodity, difficult to purchase with all the policy (quota) - Sugar substitute much easier to purchase

MEDIUM PRESSURE

PORTERS FIVE FORCES (ADAMS)

Bargaining power of buyers Wide range of product Consumers have the choice Switching cost is non-existent

HIGH PRESSURE

THEREFORE THE PORTERS FIVE FORCES IS:

MEDIUM PRESSURE

BCG MATRIX (CS)

ANSOFFS MATRIX

FINANCIAL RATIOS
UK Interest rate
D/E
0.50 0.45 0.40 0.35 0.30 Axis Title 0.25 0.20 0.15 0.10 0.05 0.00 D/E 1997 0.36 1998 0.26 1999 0.14 2000 0.17 2001 0.46

 D/E

ROA Net income/assets= 7.7%

D/E increase but below 0.5

Good health company Leverage increase

Interest
Interest decrease Leverage increase - ROE ROE Increase ROE 2001= Net income/Equity= 18% good return on investment

VALUE CREATED (%OF PURCHASE PRICE)

45% 40% 35% 30% 25% 20% 15% 10% 5% 0% 39% 4.0 36% 4.1 33% 4.2 29% 4.3 27% 4.4 24% 4.5 4.0 4.1 4.2 4.3 4.4 4.5

THE BID
Pro Will catch Wrigley in the gum segment Distribution channel opportunities Cultural Fit Good relationship with Pfizer Adams has the same cost structure than the typical confectionery company Con Lack of experience in C-S management team Do not succeed with their existing brands Adams products have no margin improvement U.S market is declining

RECOMMENDATIONS
Buy Adams for $4 billion The strategy is sound but the team leadership may not be enough experienced to succeed in this acquisition. Unique opportunity to be a market leader Finance the acquisition with debt:

Tax benefit
Lower floatation costs Gives a posit signal to the market

CS is a strong cash generating business

CS is a healthy company Keep innovating

CADBURY SCHWEPPES SINCE 2002

17 December 2002 : Cadbury Schweppes became the biggest confectionery business in the world. March 2008: Demerger between Schweppes and Cadbury Cost 1,2 billion February 2010 : Kraft acquired Cadbury