Cadbury Schweppes to Acquire Remaining 55% Stake in Dr Pepper/Seven Up Bottling Group (Bg) for $353 Million (£198 Million)

25 April 2006

• Acquiring the remaining 55% of BG for $353 million (£198 million) in cash
• Represents an enterprise value/2005 EBITDA multiple of 7.1 times
• Cost and revenue synergies of $120m by 2010; 50% realised by 2008
• Acquisition enhances 2006 underlying earnings; exceeds cost of capital in 2008
• Strengthens route to market for US beverages business
• Increases ability to leverage scale with US retail customers
• Enhances revenue growth potential for US beverages
• Agreement also reached to acquire All American Bottling Group, the 3rd largest independent bottler

Todd Stitzer, CEO of Cadbury Schweppes, said:  "The acquisition is strategically consistent, financially attractive and value enhancing. It gives us greater control over the distribution of our brands; improved operating efficiencies and customer service; and greater access to faster growing water and energy drinks".

Transaction Overview

We are announcing today that we have agreed to buy a 53% stake in Dr Pepper/Seven Up Bottling Group (BG) from The Carlyle Group for $334 million (£187 million). Following completion, we intend to purchase the remaining equity in BG on the same terms, in respect of shares held by management and employee share options, for an additional $19 million (£11 million). These purchases will increase our stake in BG from 45% to 100%.

BG, which is the largest independent bottler in the US, had revenues of $2.0 billion and underlying EBITDA of $204 million in 2005. Based on a total enterprise value of $1,458 million, the deal represents a 2005 EBITDA multiple of 7.1 times. The acquisition will be financed from our existing resources.

The acquisition is expected to enhance our underlying earnings in 2006 and exceed our weighted average cost of capital in 2008. Value creation will be driven through a combination of cost and revenue synergies which are expected to reach $120 million by 2010. The transaction is subject to regulatory approval in the US and is expected to close in early May.

The integration of BG with our US beverage business is a significant step in achieving our strategic goal of strengthening and securing our route to market in the US as it:

• Consolidates the manufacture and distribution of our beverage brands into three strong, cost effective scale systems - company-owned, Coke bottlers and Pepsi bottlers
• Enables us to more effectively leverage our broad brand portfolio by simplifying our interactions with our retail customers
• Enhances our revenue growth by providing the additional funds to re-invest in our core beverage brands, notably Dr Pepper, and in accessing under-exploited higher margin convenience channels

On completion, BG will be integrated with Cadbury Schweppes Americas Beverages (CSAB) and will be known as Cadbury Schweppes Bottling Group (CSBG). Gil Cassagne, currently President and CEO of CSAB, will run the combined business. Larry Young, currently CEO and President of BG, will become Chief Operating Officer of CSBG reporting to Gil. His responsibilities will cover the supply chain for the region and the operation of BG.

We have also entered into an agreement in principle to acquire the assets of the All American Bottling Company (AABC), the third largest independent bottler in the US. The transaction is subject to confirmatory due diligence and regulatory approval and is expected to close during the second quarter. The purchase price is expected to be around $65 million. AABC had revenues of around $180 million in 2005 and distributed 2% of CSAB's carbonated volumes in the US.

Strategic Rationale for the Acquisition

BG will be fully integrated with our US beverage operations to create a business with revenues of around $4.8 billion. This will significantly enhance our ability to produce sustainable revenue growth and returns from our US beverage business by: strengthening our beverage route to market in the US; enabling us to better leverage our scale and brand portfolio with our customers; and creating new opportunities for growth.

i) Strengthen our US Beverage Route to Market

Our beverage route to market in the US will be significantly strengthened both through further consolidating the manufacture and distribution of our brands and improving the cost competitiveness of our company-owned operations.

Following the deal, the manufacture and distribution of our beverage brands in the US will be focused on three strong, scale systems: company-owned; Coke aligned bottlers and Pepsi aligned bottlers. Our company-owned operations will distribute around 40% of our total US beverage volumes, including both carbonate and non-carbonate brands. Coke and Pepsi bottlers together account for around 40% of our total volumes, primarily Dr Pepper.

We expect our company-owned system to be a more effective vehicle for further IBS consolidation. To that end, today we are also announcing an agreement in principle to acquire the assets of the All American Bottling Company. We expect to spend around $200 million over the next 2 years on further Independent Bottling System (IBS) acquisitions.

We expect to be able to reduce operating costs and improve efficiencies across the new business by optimising our manufacturing configuration, leveraging our combined procurement spend and streamlining our commercial and back-office functions.

ii) Leverage our Scale with Customers

CSAB is the tenth largest supplier of food and beverage products to the US grocery trade. However, our multiple routes to market mean that we are not always able to leverage this scale. Merging BG with our business in the US will enable us to more effectively leverage our position in the market by reducing the complexity of our interactions with our retail customers. In particular, we will be better equipped to service the sophisticated and fast growing national retailers.

iii) Enhance our Revenue Growth

The addition of BG's brands to our existing portfolio extends our participation into faster growing categories of the beverage market, through BG's wholly owned water brand, Deja Blue and through non-Cadbury Schweppes licensed brands such as Monster energy drinks, Fiji premium waters and Glaceau vitamin enhanced waters.

The integration of the two businesses will release additional funds which will be reinvested in growth initiatives including increasing investment in our core brands, particularly Dr Pepper, and accessing higher margin impulse channels where we are currently under-represented.

Value Creation

Based on an enterprise value of $1,458 million, the deal represents a 2005 EBITDA multiple of 7.1 times. The total cost of acquiring the outstanding equity will be $353 million: this sum includes the cost of shares held by Carlyle and management and employee options. In addition, on completion, we will consolidate an additional $587 million of BG third party debt. 

The acquisition is expected to enhance earnings in its first year (2006). Return on invested capital (ROIC) is expected to exceed the Group's weighted average cost of capital in 2008 reflecting modest underlying growth in the base business and the generation of cost and revenue synergies.

Total synergies are expected to be around $120 million by 2010 with around 40% delivered from cost savings and the balance from revenue synergies. Cost synergies of $45 million will be generated from consolidation of manufacturing facilities, joint procurement initiatives and commercial and back-office savings. We expect all of the cost synergies to be delivered by 2008. Revenue synergies of $75 million will be weighted toward 2009 and 2010 and are expected to be generated from better strategic alignment of selling and promotional programmes, particularly to national accounts, and greater penetration of higher margin impulse channels.

We expect the integration of BG with our US beverage business to give rise to restructuring costs of around $35 million in 2006 and 2007 which will be separately disclosed and excluded in our underlying performance. Capital spend at BG will increase from around $80 million to $105 million per annum by 2008. In addition, we expect to spend around $30 million per annum over the next two years to deliver the cost and revenue synergies in respect of optimising manufacturing and investment in IT and new distribution assets (trucks and vending machines).

Information on BG

We entered into a bottling partnership with Carlyle in 1998 to create a platform to consolidate the IBS in the US and provide a secure and strengthened route to market for our beverage brands in that market. BG is the largest bottler in the IBS accounting for around 60% of total IBS volumes.
 
BG has exclusive long-term license rights to sell a range of mainly carbonated soft drinks brands in Texas, California and 22 other Western and Mid-Western states of the US covering around one third of the US population.  BG manufactures and distributes approximately 23% of our US beverages volumes. Our brands account for around 85% of BG's volumes and include Dr Pepper, Seven Up, A&W, Sunkist, Canada Dry and Snapple. The remaining 15% of BG's volumes consist of other license brands including Big Red and Monster, and company-owned brands including the Deja Blue water brand. The business has 9,000 employees. It has 10 manufacturing plants and is headquartered in Dallas, Texas.

For the 2005 financial year, BG reported net revenues of $2.0 billion, underlying EBITDA of $204 million and underlying EBIT of $138 million.  Underlying EBITDA and EBIT exclude a net $13 million in respect of a $16 million credit arising from the settlement of a lawsuit involving the producers of high fructose corn syrup (HFCS) offset by $3 million of one-off costs. As at the 2005 balance sheet date, BG had net assets of $526 million and gross assets of $1.98 billion. Net indebtedness at the same date was $822 million, of which $235 million was a loan note from Cadbury Schweppes.

There is a significant amount of trading between our North American beverages business and BG which will be eliminated on consolidation. The pro-forma effects of consolidating BG for 2005 are outlined below.

Financial Impact on Cadbury Schweppes

BG was accounted for as an associate in our accounts for our 2005 financial year.  On completion, BG will be fully consolidated in our accounts. The tables below show the pro-forma impact on our 2005 Income Statement and Balance Sheet of consolidating BG.

The consolidation of BG with Cadbury Schweppes in 2006 will reduce our underlying operating margins. For 2006, we will report the results of BG separately from the rest of the Group so that the performance of our existing business in relation to our financial goal ranges (see note 3) can be easily assessed.

Cadbury Schweppes and BG 2005 Pro-forma Consolidated Income Statement

1 BG results translated at $1.82/£, the average $/£ exchange rate for 2005
2 In accordance with IFRS 5, the post-tax profits of Europe Beverages, sold in February 2006, are recorded in discontinued operations

The above table shows the pro-forma impact on our 2005 Income Statement of consolidating BG. In accordance with IFRS 5, the results of Europe Beverages, which was sold in February 2006, have been included as a single item below profit and after tax and therefore are not included in revenue or underlying profits but are included in underlying earnings per share.

The following adjustments have been made on consolidation:

• £242 million to revenue in respect of inter-company transactions
• £3 million to underlying profit from operations in respect of profits in stock
• £14 million to associates in respect of Cadbury Schweppes' 45% share of BG's post tax profits
• £7 million to financing primarily reflecting the cost of purchasing the 55% stake in BG offset by the saving on refinancing BG's debt, which will take place on completion. No adjustment has been made for the interest receivable on the £1.15 billion net proceeds from the sale of Europe Beverages.

On a pro-forma basis, before synergies, the consolidation of BG: increases our revenues by 14%; reduces our underlying operating margins by 90 basis points; and increases our underlying EPS by 0.3 pence or 1%.

Cadbury Schweppes and BG 2005 Pro-forma Consolidated Balance Sheet

1 BG Balance Sheet translated at $1.72/£, the year end $/£ exchange rate for 2005
2 Primarily reflects Cadbury Schweppes' share of Cadbury Nigeria. Following an increase in the Group's stake in Cadbury Nigeria to 50.02%, this business will be fully consolidated in 2006.

The above table shows the pro-forma impact on our 2005 Balance Sheet of consolidating BG with Cadbury Schweppes before any fair value adjustments.

BG is included in our 2005 Balance Sheet as an associate investment. The £302 million shown above reflects:

• £137 million in respect of a CS loan note to BG
• £165 million in respect of our 45% share of BG's net assets and goodwill on the initial acquisition

On consolidation, the following adjustments have been made:

• The investment in associates in respect of the loan note and share of BG net assets is eliminated 
• An amount of £64 million which will form part of the goodwill arising on acquisition of BG

As a result of this transaction, our pro-forma net debt increases from £3.9 billion to £4.4 billion, reflecting £205 million for the purchase of the 55% equity stake and the assumption of an additional £341 million of net debt. If the £1.15 billion net proceeds from the sale of Europe Beverages were included, our pro-forma net debt would be £3.3 billion.

Regulatory

The purchase of Carlyle's 53% stake in BG is subject to Hart-Scott-Rodino approval in the US. Subject to this approval being received, we expect completion to take place in early May.