Cadbury to cut costs as drinks sale nears-source

(Adds analyst comment and updates shares)

By David Jones and Mark Potter

LONDON, June 1 (Reuters) - Cadbury Schweppes (CBRY.L) is planning to move out of its expensive central London offices as part of a cost-cutting drive that will be announced on June 19, a source familiar with the matter said on Friday.

The world's biggest confectionery group is set to present its new strategy for its core chocolate and sweets business to trim around 200 million pounds ($396 million) from its annual cost base after the group sells off its multi-billion pound soft drinks interests.

The maker of Dairy Milk chocolate, Trident gum and Dr Pepper drinks made pretax profits of 931 million pounds in 2006 and has previously indicated it will revise its strategy for the confectionery business once its soft drinks unit has been sold.

The June 19 update is likely to spell out the full scale of the cost cuts, say the group is progressing well with its sell-off of its Dr Pepper and 7UP drinks business and give an update on first-half trading, the source said.

"They will be leaving," the source said, confirming a report in the Financial Times newspaper that the group will move out of its Mayfair offices in central London into cheaper accommodation in Uxbridge, west of London and near Heathrow airport.

Analysts said the cost cuts will lead to factory closures among Cadbury's 60 worldwide confectionery plants and reduce its global sweets workforce of around 50,000. Cadbury shares were up 0.2 percent at 712 pence by 1025 GMT in a firmer London stock market.

The move will form part of a cost-saving programme aimed at lifting profit margins at the group's core confectionery business towards those of U.S. rivals such as Wm. Wrigley Jr. Co. WWY.N and Hershey Co (HSY.N).

"Cadbury has scope to increase its margins but not perhaps to the level of Wrigley and Hershey for structural reasons," said analyst Julian Hardwick at brokers ABN AMRO.

He puts Cadbury's confectionery operating margins at 11.2 percent in 2006 compared to Wrigley's 18.3 percent and Hershey's 20.3 percent, but added the U.S. groups have higher margins due to Wrigley's dominant chewing gum market shares in the U.S., UK and Germany, and Hershey's big market share in U.S. chocolate.

Cadbury's previous four-year 2004-2007 "Fuel For Growth" strategy succeeded in driving up sales within its target of 3-5 percent per annum, but failed to match its profit margin targets as the group was hit by input price rises and a salmonella related product recall in Britain during 2006.

Cadbury has received at least 12 expressions of interest for its soft drinks business, valued as high as 8 billion pounds

($16 billion), and good progress is being made on the sale after details of the business went to prospective buyers at the end of last month, sources close to the situation said.

The auction is likely to be dominated by private equity players with Blackstone Group [BG.UL], Kohlberg Kravis Roberts & Co. [KKR.UL] and Lion Capital forming a bidding consortium, after Lion and Blackstone bought Cadbury's continental European beverages business in February 2006, the sources said.

Another consortium of Texas Pacific Group [TPG.UL], Bain Capital and Thomas H. Lee Partners LP [THL.UL] have also formed a bidding group, the sources added.

In March Cadbury unveiled its plans to split the sweets and drinks units which was widely regarded as the group conceding to pressure from investors led by U.S. billionaire Nelson Peltz to sell or spin off its drinks unit.

In October last year Chief Executive Todd Stitzer had ruled out a split.

($1=.5056 Pound)

((Editing by Greg Mahlich/Rory Channing; Reuters Messaging: david.jones.reuters.com@reuters.net; +44 20 7542 7972))

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