Is Adams the right buy for Cadbury Schweppes?

Despite acquiring Adams in 2000 as part of its Warner-Lambert purchase, Pfizer has never considered the business to be in line with its pharmaceutical and healthcare focus. Regulations had prevented its sale until recently, and now reports suggest Cadbury Schweppes is set to make a bid.

Included in the sale are the global Trident and Halls brands, world leaders in gum and sugar confectionery respectively, in addition to other strong brands such as Dentyne and Chiclets, both in gum. A range of other brands such as Body Smarts, North American chews and snack bars, as well as Viaredin, a Romanian slimming drink, are also included.

Adams has clear strengths and the acquisition would fit in with Cadbury Schweppes’ long-term strategy of focusing on growth sectors, such as gum, and developing markets including Eastern Europe and Latin America. However, Adams may not be the lucrative acquisition that it first seems.

Latin American gum is key for Adams

Adam’s core strength lies in Latin American gum, where it dominates the market with a 55% share. This is the result of being one of only a handful of companies to have a presence in all six key countries in the region. Furthermore, Adams has benefited from a strong increase in gum sales in the region, coupled with a growing interest in healthier options, such as the sugar-free gum brand Trident. Indeed regional sales of regular sugar-free gum increased 35% between 1997 and 2002.

The company is also strong in North America, which accounts for 31% of its total gum sales. Adams’ functional gum portfolio is particularly strong here, with the core Trident brand extended into whitening and recaldent-enhanced variants.

Medicated confectionery a declining sector

In medicated confectionery, Halls, with its trademarked mentho-lyptus formula, is positioned in North America and Northern Europe as providing relief for congestion and sore throat, while in Latin America, Asia and Southern Europe it is regarded as a refreshing sugar confectionery product. Adams holds shares of over 40% in both the North and Latin American medicated confectionery markets, as well as a very strong share in the small Eastern European market.

Representing over 20% of the company’s confectionery sales, medicated confectionery is, however, a declining sector globally, registering a decrease in value sales between 1997 and 2002.

Cadbury Schweppes would lead the confectionery market

As a result of any such acquisition Cadbury Schweppes would more than double its share of the global sugar confectionery market, resulting in a leading share of 6%. The key effects of the acquisition would, however, be felt in gum where, in addition to the purchase of Dandy and Kent earlier this year, Adams’ sales would allow Cadbury Schweppes to challenge Wrigley’s global dominance.

Moreover, the acquisition would allow Cadbury Schweppes to leap-frog confectionery market leaders Nestlé and Mars to take pole position in the global confectionery market with a share of well over 9%.

The acquisition would be clearly beneficial to Cadbury Schweppes as Adams had higher sales than it in a number of key regions, including Eastern European sugar, Latin American sugar and gum, and crucially, in North America where Cadbury has no appreciable presence in gum and only a 1% share in sugar confectionery.

The perfect match?

However, despite the obvious benefits for Cadbury Schweppes, the acquisition will not be without some risk.

Nearly 50% of Adam’s sales are in the declining sugarised gum and bubble gum sectors. Sugarised gum is forecast to decline overall between 2002 and 2007. Although some regions will continue to post value growth for this sector, Adams is either weak in, or entirely absent from them – principally Asia Pacific and Australasia.

The picture is more positive for bubble gum, with nearly 8% growth projected over the period to 2007, particularly in Asia Pacific where Adams has a significant share. However, in terms of total potential bubble gum sales are likely to be smaller than the more profitable functional gum sector by 2007, a sector where Adams has failed to build on its strengths. Despite owning the hugely successful trident gum brands, Adams has not launched functional brands in Latin America, leaving the ‘first mover’ advantage to Perfetti Van Melle and Cadbury itself.

Furthermore, Adams’ reliance on Latin America exposes it to risk, as although the region is set to see positive forecast growth, economic uncertainty and civil unrest may reverse these trends at short notice, as was been seen in Argentina earlier this year and Brazil in 2001.

It is possible therefore, that Adams may go to a bigger player more able to absorb loss-making sectors, or that, despite Pfizer’s unwillingness to do so, may have to be sold off piecemeal. Whatever ultimately happens to Adams, its sale will have taken longer than expected.