Cadbury Schweppes Plc agreed yesterday to buy US Dentyne-gum maker Adams for $4.2 billion in cash to make the British confectioner a world leader in candy and number two in chewing gum.
Shares in Dairy Milk and Schweppes tonic firm Cadbury fell four per cent after credit agencies took a knife to its ratings and raised concerns over a possible deterioration in its debt position. Some analysts also put a question mark over price.
Cadbury said the purchase from drug maker Pfizer Inc. would be debt financed, possibly through a $3 billion bond issue over the next two years. Cost and revenue benefits would reach $185 million in 2006, it added.
Cadbury, owner of the Trebor mint and Hollywood gum brands, will gain Adams' Trident and Dentyne chewing gums, Bubblicious bubble gum, Halls cough drops and Clorets breath fresheners.
For Pfizer, the deal marks the first stage of a two-step move to shed the non-pharmaceutical businesses it acquired in its merger in 2000 with Warner-Lambert.
The acquisition will make Cadbury the market leader in so-called functional confectionery - such as gums and refreshing products - where growth is double that of the broader confectionery market. It will gain scale in markets such as Latin America.
"This is a reasonable price, and a good strategic move," said analyst Michael Landymore at Investec Securities.
Still, Cadbury shares fell four per cent to 393 pence by 1354 GMT on news of the deal, previously reported by Reuters.
The stock has outperformed the FTSE 100 blue chip index by 25 per cent in the last year but has been largely in line with the DJ Stoxx European Food and Beverage Index.
Another analyst said the price tag was a little high, however, and he cast doubt on the cost and revenue benefits.
"They missed out on Hershey. It seems like there's a bit of desperation in there," a share dealer said, referring to the US sweet maker that was pulled off the auction block this year.
Chief Executive John Sunderland said the focus of Adams was on breath fresheners, sore throat remedies and tooth whitening gum, which were all set to continue to grow strongly.
"These functional areas are broadening and increasing all the time. There is great potential on a global basis for this relatively untapped area," Sunderland added.
Credit rating agencies Moody's Investors Service, Standard & Poor's and Fitch cut Cadbury's long-term debt ratings by three notches, saying the deal would lead to a deterioration in Cadbury's debt-protection measures. They also cut the firm's short-term creditworthiness.
Industry analysts also said Cadbury needed to turn Adams around after its profits fell over the last six years and margins tumbled. Though functional confectionery is growing, Adams has underperformed, they said.
"Strategically we can not fault the acquisition, but Adams under the ownership of pharmaceutical companies has underperformed a fast-growing market and Cadbury has its work cut out to turn it around," said one fund manager.
Under the terms of Pfizer's merger with Warner-Lambert, Pfizer was required to wait two years before selling Adams and its Schick-Wilkinson Sword razor units. British-Dutch household product company Reckitt Benckiser Plc has emerged as the top remaining bidder for Schick.
Pfizer, the world's biggest drug maker, put Adams up for sale in June. The auction drew interest from some of the world's top food companies, including Swiss-based Nestle, which makes KitKat chocolate bars, and US group Kraft Foods Inc, which owns chocolate maker Suchard.
An industry source told Reuters that Nestle had decided not to make a bid for Adams.
Sunderland said the deal would make it global confectionery leader alongside Nestle and US privately owned Mars, and increase Cadbury's gum market share to 26 per cent from eight per cent, just behind world leading chewing gum company Wm Wrigley Jr Co. with 31 per cent.
The key to the deal was its four "power" brands - Halls medicated sweets, Trident sugarfree gum, Dentyne fresh breath gum and Bubbas bubblegum - the first three being in the area of functional confectionery products, Sunderland added.
He pointed out that these functional confectionery products were growing annually at five per cent against an overall confectionery market growing at two per cent.
The Cadbury deal will dilute underlying earnings in 2003, but will enhance earnings in 2004 and thereafter. The deal's valuation represents two times Adams' 2001 sales and 12.8 times 2001 underlying earnings before interest, tax, depreciation and amortisation (EBITDA), Cadbury said.
Investment banks Merrill Lynch and Lazard advised Pfizer, while Cadbury's banking adviser was Credit Suisse First Boston and its corporate broker Hoare Govett.