Cadbury should swallow Hershey or be swallowed

By David Jones - Analysis

LONDON (Reuters) - As Cadbury Schweppes (CBRY.L) moves closer to being a pure confectionery company by selling its North American Dr Pepper drinks unit, industry analysts say it should now pull off a merger deal before it becomes a target.

Cadbury's shareholders on Friday approved the British group's plan to spin off Dr Pepper in May, and analysts say the company is now looking to buy U.S.-based chocolate maker Hershey Co (HSY.N).

The deal would have clear strategic logic, as Cadbury, the world's biggest confectionery group, lacks presence in the U.S. chocolate market, while Hershey is looking to expand overseas.

The London-based maker of Dairy Milk chocolate, Trident gum and Halls cough drops will be reborn on May 2 as Cadbury Plc after being wedded to Schweppes for 39 years. The Dr Pepper Snapple Group (DPSG) unit will be separately listed in New York from May 7.

"Cadbury's management has made clear that they are interested in a deal with Hershey in order to consolidate the confectionery industry," said analyst Ian Kellett at Numis.

Others are conscious of the obstacles, particularly the potential obstruction of the trust that controls Hershey.

"It would make strategic sense to combine Hershey and Cadbury in the U.S., although it is unlikely near-term, given the trust's commitment to retain control of Hershey," said Polly Barclay at Cazenove.

However, last week's announcement that the Hershey Trust's Chief Executive Robert Vowler, Hershey's top shareholder, will retire in April 2009, could mean events are moving forward after fruitless Cadbury-Hershey takeover talks of recent months.

Cadbury's shares closed down 2.6 percent at 563-1/2 pence on Friday after what analysts called a disappointing first-quarter trading update. At that price the group is worth about 12 billion pounds ($23.7 billion), while Hershey's market capitalisation is around $8.8 billion.

TWICE THE MARGIN

Although the U.S. confectionery market shows low growth, it is the largest in the world, accounting for a quarter of global sales, and Hershey's leadership position in U.S. chocolate has helped it achieve double the profit margin of Cadbury.

The trust, which controls 78 percent of Hershey votes, pushed the management to put the company up for sale in 2002, only to pull back later and cancel the deal in the face of intense public pressure from community groups and elected officials.

Back then, Cadbury had combined with Nestle (NESN.VX) to plan a Hershey break-up deal before the sale collapsed.

But recently the trust has voiced its displeasure with Hershey's results amid signs it might be taking a more pragmatic approach.

If Hershey did again consider a deal, Cadbury could face competition from Wm. Wrigley Jr Co WWY.N, which also mounted a bid back in 2002 to combine Wrigley's No 1 spot in U.S. gum with Hershey's No 1 position in U.S. chocolate and candy.