Credit crunch hits drinks firms

The “credit crunch” and resultant stock market tumble has not left the drinks sector unscathed. Cadbury Schweppes, J Sainsbury and Vin & Sprit are faced with changed …

… conditions that could have a significant impact on their futures.

Cadbury originally planned a trade sale of its soft drinks arm, which includes 7Up and Dr Pepper, for about £7 billion, but because credit is more expensive, potential buyers are re-evaluating their options with brokers saying that in the current market £6bn is a more realistic price…  if a buyer comes forward. Cadbury is known to be considering the option of listing its drinks arm as a separate company if a sale proves too difficult.

In the same vein, Norman Wesley, the head of Fortune Brands, has thrown down the gauntlet to potential rivals for Vin & Sprit, the state-owned Swedish group famed for Absolut vodka. He says venture capital groups may have difficulty in completing any acquisition because of difficulties in raising funds in the current market. This increases the likelihood of either a trade sale or a stock market listing for Vin & Sprit.

The same problem is facing Delta Two, the Qatar-backed fund bidding £10.4bn for J Sainsbury. The venture fund is having to reaffirm the backing for the debt it plans to raise for the bid amid concerns that its ability to finance the deal is weakening. The Sainsbury board has demanded that the Qataris reduce the amount of debt in the bid and to provide firm evidence that funding for it is in place.

The current volatile equity market has, however, benefited some drinks companies. Both Marston’s (formerly Wolverhampton & Dudley) and Greene King have used the fall in their share prices to buy back shares on several occasions over the past two weeks. The effect of the move is to increase their earnings per share and thus potential dividends.

Ron Emler, 22/07/08