Cadbury bubble could burst

While the company’s full-year results should show earnings in line with market expectations when they are published next Wednesday, analysts have been downgrading Cadbury’s stock after doubts surrounding the acquisition of chewing gum maker Adams for $4.2bn (|£2.56bn).

The main concern from investors had been the method of purchase of Adams, the second biggest chewing gum business in the world, which had been fully financed through debt.

The other issue with the purchase was the price. Many thought Cadbury had overpaid for Adams, with analyst valuations topping out at $4bn. There was, however, stiff competition for the company from the likes of Nestle and Kraft Foods that would have helped force up the price.

Cadbury could make savings of around $100m through cutting overlaps and pushing the Adams products through its own distribution network but further synergies are expected to be limited due to Cadbury’s small size in the US.

Chief financial officer at Cadbury Schweppes David Keppler played a key part in the purchase of Adams and will now have an important role in identifying and implementing cost savings during the integration of the two businesses. The task could be made tougher by several key boardroom changes due to happen this year.

Current chief executive John Sunderland is to move to the position of chairman in May, with current chief strategy office Todd Stitzer taking on the CE’s position at that time.

This change has attracted much attention as former Cadbury chairman Sir Adrian Cadbury has done much work in the realm of corporate governance and has come out against chief executives taking over chairmanships.

In his latest book, Corporate Governance and Chairmanship, he wrote: ‘Ideally, chief executives who become chairmen will do so in companies other than their own where the previous position will be irrelevant.’ He did however accept that such a move was ‘workable’ especially since he made the same transition himself while at Cadbury.

The company continues to benefit from strong growth in the UK and Ireland in terms of confectionery while beverage sales remain strong. But earnings are expected to be affected by the strong UK pound.

Cadbury gets 80% of its profits from overseas and the conversion rate could impact earnings by around 4%.

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