When Cadbury Schweppes announced last week that it was splitting its confectionery and Americas Beverages businesses, there was speculation that its confectionery arm would become a takeover target, with names such as Hershey and Wrigley in the frame.

Earlier this week, Cadbury Schweppes chief executive, Todd Stitzer fuelled speculation that a deal could be in the offing when he admitted to analysts that a merger with Hershey would have more financial logic to it now than when Cadbury tried to acquire the US confectioner five years ago. So is a deal on the cards - and if it is, will the confectionery arm be the one buying or being bought?

It would be no surprise if Cadbury - which came under fire this week for stereotyping Caribbean culture in its Trident gum ad - was to attempt a merger with Hershey, says Jeremy Fialko of ABN AMRO. "There's no doubt Cadbury will be looking to actively consolidate in the global confectionary market as it will be in a stronger financial position after the demerger and possible sell-off of the drinks business," he says.

"Having said that, if this situation arose last year, Cadbury would have tried to buy it then. I don't think the demerger is the catalyst for Cadbury to start significant confectionery deals."

Analysts agree that a merger with Hershey would be more likely than an acquisition because of the complicated nature of the latter's ownership, though it would mark a u-turn for the smaller company, which was last year rumoured to be considering a takeover of Cadbury. If the confectionery arm does pull off this or any other acquisition, it would mark further growth for the business that is hungry for an acquisition following Green & Black's in 2005.

But there is still speculation that Cadbury could be more susceptible to takeover as rivals look to cash in on its strong brand heritage and its large portfolio.

"The separation would create a neat little unit within the confectionery business," says David Hallam of Evolution Securities. "It would be a major attraction."

Divisions in the confectionery side of the business make it an attractive proposition, he adds: "If you break the confectionery arm up and sell it separately you might get the likes of Wrigley interested in the non-gum business and Nestlé interested in the gum business."

Fialko concedes: "There's a great possibility that Cadbury could become a takeover candidate but that's not to say it's a likely option. As a standalone confectionery business it will be easier to buy than if it were a confectionery and drinks business."

Either way, a demerger would encourage Cadbury to focus on being more efficient in the UK market, says Martin Deboo of Investec. "Confectionery will be the only business it has to concentrate on," he says.

"Cadbury has said it believes there's opportunity to rationalise confectionery costs so I would expect its focus to be looking at its supply chain infrastructure and at potential acquisitions."

Cadbury Schweppes' chairman Sir John Sunderland has said

the split will give both management teams the opportunity to meet the full potential of the businesses, but has given little indication of the company's long-term strategy. In the short-term it is likely to carry on unchanged.

"Cadbury will continue to go on as it has been with its portfolio of products," says Deboo. "The real growth opportunity in the global confectionery market is in gum and premium, and that's where I suspect Cadbury will be heading."n

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