Cott Corp. Upgraded On Possible Merger With Cadbury Schweppes

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 |  Includes: COT, CSG
by: FP Trading Desk

While a merger between Cott Corp. (NYSE:COT) and Cadbury Schweppes (CSG) may be something the beverage industry considers an inevitable outcome, there remains some doubt as to how a deal might take shape.

Following Friday’s announcement from Cott Corp. that it is looking for help from private equity as it explores how it can participate in the soft drink sector’s consolidation, the stock jumped 25% to C$18.44 in Toronto.

However, Merrill Lynch analyst Christine Farkas remains unsure whether Cott is looking at teaming up with private equity to bid for Cadbury Schweppes, which plans to separate its confectionery and beverage divisions. Another possible scenario is that private equity buys both Cott and Cadbury, then merges the two.

Other scenarios could also emerge, Ms. Farkas said in a note to clients, while adjusting her rating on Cott shares to “neutral” from “sell” given these possible outcomes and expectations for market speculation in the future.

However, she points out that despite Cott’s cost-cutting attempts, the company’s U.S. exposure, where soft drink sales are declining, as well as climbing prices for both aluminum and sweetener, pose major challenges for the world’s largest retailer brand soft-drink supplier.

“Until further information is available, which might not be until June when Cadbury suggests it intends to discuss its plans further, COT’s shares may trade in a tight trading range and be highly sensitive to market developments,” Ms. Farkas said.

National Bank Financial analyst David Newman is much more optimistic, raising his price target on Cott shares to US$20 from US$13, while moving his rating to “outperform” from “underperform.”

He noted that Cott and Cadbury, with estimated market shares of 9% to 10% and 14.9% respectively in the U.S. soft drink market, would be solidly positioned in third place behind Coke (NYSE:KO) and Pepsi (NYSE:PEP).

Mr. Newman also pointed to the synergies that could be achieved through manufacturing and distribution.

He also noted that the combined company could have more clout when it comes to negotiated purchase prices for materials such as aluminum.

The price target for Cott shares was also hiked to US$20 from US$18 at UBS.