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Cadbury Schweppes (CSG)
Big Changes Could Be in Store for Cadbury
Cadbury Schweppes has to be feeling the heat today. The board at the world's largest snack and drink maker by market share received a letter from noted activist investor, Nelson Peltz, which basically said that the company needs to pull up its stocks and work harder or else... While informing the board that he has raised his stake in the company to 4.5% from 3.5% through his investment arm, Trian, Peltz put forward a series of goals for the company. He believes accomplishment of these goals will increase shareholder value by close to 60%. Is Cadbury going to adopt the goals set forth by Peltz and if so, can it execute efficiently enough to meet them? If not, what's Peltz going to do next?
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Peltz is well-known for taking large stakes in companies that he feels are being operated inefficiently and pressuring them to change. Some of the businesses that he has gotten himself involved in include Heinz (HNZ: Charts, News, Offers) where he was successful in putting two of his people on the company board and Kraft Foods (KFT: Charts, News, Offers), in which he owns a 3% stake. To his credit, Peltz is different from other corporate raiders in the sense that often, his primary objective is not to make a quick buck through nifty financial engineering but to push for improvements in a company's operations and focus on longer-term returns. That is why shareholders in Cadbury have reason to be optimistic that Peltz's involvement in the London based company can have positive returns and make the company more efficient.
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But does the top-brass at Cadbury see things in the same manner? That remains to be seen but most likely, from their point of view, Peltz is just a large shareholder that is making their life more difficult. Peltz can already be held responsible for one major decision that Cadbury has made over the last year - getting rid of the North American beverage business. Peltz began agitating for this as soon as he acquired his first position in Cadbury in December 2006 and in March of this year, Cadbury acquiesced and begrudgingly agreed to sell the business which includes brands such as Dr. Pepper, 7 UP and Snapple. Turmoil in the credit markets over the summer prevented a sale from happening even though at one stage; a couple of private equity firms including Blackstone and Bain Capital Partners were close to submitting a bid around the $15 billion range. Therefore, Cadbury has instead decided to spin off the beverage business into a new company. Peltz is okay with that, but he also wants to see the new company to sell certain brands including Motts, ReaLemon and ReaLime, which according to him, generate unneeded complexity to the company's operations.
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The other big area of focus for Peltz is Cadbury's operating margins. Cadbury's operating margin last year was only 10.1% less than half of the 20.4% margin at Hershey. Cadbury's board has vowed to increase margins to the mid-teens by 2011. Peltz believes this is not enough and instead wants the company to achieve margins in the high-teens in that timeframe. So Peltz is essentially calling for Cadbury to be more aggressive with its cost-cutting measures, something which Cadbury's management may be unwilling to do. Another Peltz demand and one that is more typical of corporate activists is that Cadbury take on more debt on its balance sheet and use those proceeds to reward shareholders via a dividend or stock buyback program. Though it is too early to tell what Cadbury's response to Peltz's suggestions (or demands depending on how you look at it) will be, the company is unlikely to be receptive to all the items and the chances of the company being able to meet the margin goals set by Peltz are slim. This could mean that a proxy fight could break out at Cadbury especially since Peltz twice warned in his letter that Trian will become "more active" if its suggestions are not acted upon. A proxy fight led by someone with a successful track record at making companies more efficient, such as Peltz, could be a positive for the stock price.
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