Todd Stitzer is learning firsthand what it’s like to deal with the growing ranks of powerful activist investors in today’s public equity markets. Early this year, the CEO of U.K.-based candy giant Cadbury Schweppes was telling just about anyone who’d listen that he was committed to keeping and expanding the company’s beverages unit, despite pleas from some analysts and shareholders to spin it off. Then, on March 13, Cadbury announced that fund manager Nelson Peltz — who has successfully agitated for recent strategy changes at H.J. Heinz Co., Tiffany & Co. and Wendy’s International — had acquired a 3 percent stake in Cadbury. Two days later Stitzer unveiled a plan for splitting up the company, saying that the board was considering either a sale or a demerger of the U.S. beverages unit. Since then, Cadbury’s share price has jumped by some 25 percent, and potential suitors have lined up to bid on the soft-drink business, which includes such brands as 7-Up, Dr. Pepper and Snapple. Late last month the company said it was leaning toward a sale.
Stitzer, a Harvard University–educated American who spent two decades with Cadbury before moving into the corner office in 2003, maintains that directors already were nearing a decision to divide the company when Peltz bought in, and only grudgingly admits to the activist’s influence over Cadbury’s direction. Meanwhile, he’s been busy cutting costs and making small acquisitions for the confectionery unit — the world’s biggest — which he will continue to run after the separation. He took some time from that hectic schedule last month for a chat with Institutional Investor Contributing Writer C.J. Prince. Following are excerpts.
Institutional Investor: When did you actually decide to break up the company?
Stitzer: As we said when we made the announcement, our board, prompted by the executive management, whose responsibility it is to provide the board with strategic options, had been considering a separation of beverages and confectionery for quite some time. It has been a strategic option under review by the board for two years.
Did Peltz’s arrival speed up that decision?
Our perspective was, we were very near a final decision, and indeed, we had publicly said we were going to consider the subject at an upcoming board meeting. When Mr. Peltz arrived on the scene, we accelerated our board meeting because we felt it would be unproductive not to move ahead with our decision.
Why would it have been unproductive?
Because in essence the board had considered and made the decision, and they felt that moving ahead, rather than having a public discussion about something they’d already decided, made sense.
So you had already decided to go ahead with it?
Well, again, we had reviewed that and were seriously considering it. When Mr. Peltz came on board we decided to accelerate our final consideration of it. It would be unfair to say we had decided, because if we had decided we would have had to have announced it.
Given that you had a different timeline in your head, is executing the split now a bit premature?
I honestly don’t think it’s premature. Several of our shareowners have made similar observations about our strategic options and, as we have a very open and transparent dialogue with our shareowners, Mr. Peltz was merely echoing the comments of a number of our other shareowners.
Do you feel too much been made of his arrival and its impact on your decision?
I think he has made observations about our business that a number of our shareowners and a number of financial analysts and we ourselves are aware of about our business. So I don’t think the subjects that he’s commented upon are in any way news to either the board or the management team or our other shareowners. I do think the press has a fascination with activist investors.
Peltz has successfully pushed for change at several other companies. What’s your opinion of him as a business strategist, and how will his involvement affect Cadbury going forward?
He is one of a number of significant shareowners in our company that we have a regular dialogue with in the context of our public announcements. We don’t have any different relationship with Mr. Peltz than we do with any other major shareowner. I absolutely have a great deal of respect for Mr. Peltz’s acumen as an investor. But we treat him just as we would treat any other major shareowner.
What are the benefits of the separation?
Separating the businesses allows two great management teams to focus on creating shareowner value for two great businesses. Obviously the 25 percent–plus increase in the share price is a reflection of the market’s view that that is the right thing to do.
You’ve just made some announcements, including a restructuring that will significantly pare down senior management and move your headquarters to reduce expenses. You’ve also sold several noncore businesses. Are these moves related in any way to the separation?
In October we had an investor seminar and indicated that there were a number of steps that we would be taking to increase our margins and returns on the business. The steps on both restructuring and headquarters moves are very consistent with what we’ve said about managing our cost base. We’ve had a program of noncore disposals since the fall of 2005, and we’re executing against that.
Are you considering selling the confectionery business at this point?
No, we’re not. Our board made a decision to separate beverages and confectionery and to have the two management teams focus on running those businesses for long-term growth and shareowner returns.
Analysts have noted that the separation makes both businesses potential acquisition targets. What is your plan to keep the confectionery business independent?
We are the largest confectionery company in the world. We have demonstrated over the last several years that we can grow revenues quite consistently at above-market levels, and we have a great opportunity to increase margins and increase returns for shareowners. So our perspective is, we’ll be focused on managing the business for organic growth and growth in margins and shareowner returns.
Will you continue your acquisition strategy — primarily small, strategic buys — postsplit?
I am pretty certain we will continue to focus on bolt-on acquisitions. We have a geographic platform at Cadbury Schweppes that is quite broad, so bolt-on acquisitions fit quite nicely into that platform. They’re very synergistic. We, more uniquely than most other confectionery companies, can make sense of them.
Pressure from activist shareholders and investors has really intensified, with many focused on short-term results. How can CEOs perform in this environment?
We live in a capitalist system, and in a capitalist system, the shareowners are key stakeholders in what the company does. We have an active shareholder engagement program, generally around our results announcements, where we try to reach out to our major shareowners and engage in a very open dialogue with them about their views on how the company should run, their views on return of capital, their views on the returns of the business. It’s our job to synthesize those views into a strategy that reflects the commercial needs of the business, the financial returns to the shareowners and the needs of the people who actually deliver all the things for the shareowners: the employees. There is a productive tension between shareowners’ desires for financial returns and employees’ desires for professional reward and experience. That’s just the give-and-take of the capitalist system.
So you don’t feel the environment has actually changed all that much?
I think there is a mix of investors. There are certain investors who focus on long-term productivity of the business in terms of cash and returns. There are other investors who have a view that is focused on the short term and the amount of returns in the short term, and I think that’s always a balance. It’s incumbent on business leaders to effectively utilize the brands and industrial assets of any business to generate a return, and I think if they can do that, a majority of shareowners will be responsive and grateful for that. If they can’t generate an appropriate return or are seen not to be using the brands and the manufacturing assets of the company in a productive way, they’ll hear about it from the shareowners.
