Cadbury Schweppes is pressing ahead with plans for a demerger rather than a sale of its US drinks business after concluding that private equity will not be able to raise the funds amid a freeze on financing.

Senior executives at the British sweets, chocolate and soft drinks maker are away on holiday but, after a board meeting last week, it is understood that they told bankers to be ready to demerge the unit within two weeks of their return.

Cadbury last month said that it was forced to delay the sale of its drinks arm, home to Dr Pepper, Snapple and 7-Up, citing volatility in the credit markets. But conditions have since deteriorated, making a sale impossible in the short term, sources said.

Cadbury would still opt for a sale if a private equity group could muster the funds, but the company has decided to proceed on the assumption that such an offer is unlikely to materialise.

A spokeswoman for Cadbury denied that a final decision had been made over which option to pursue. She said the company had stated in March that it would adopt a dual-track approach and would continue to do so.

The news came as shares of Cadbury yesterday fell more than 2 per cent after Credit Suisse cut its price target for the company to 560p from 600p, saying that the present credit squeeze meant Cadbury would not be able to sell its beverages business to private equity and would have to opt for a flotation or trade sale.

That option, however, would bring in £1 billion less than the £7 billion to £7.5 billion widely mooted and may even leave investors with US-listed shares they would have to sell, Credit Suisse said.

In recent weeks banks that have been exposed to the collapse of the US sub-prime mortgage market have refused to lend to private equity until their backlog of leveraged unsyndicated deals is cleared. In the US, that total is about $250 billion of deals and some bankers predict it will take several months to clear.

In the meantime, buyout firms have had to put all their deals on hold, or cancel their plans altogether, as banks shut down for new loans.

If Cadbury proceeds with a demerger or IPO, the unit could still be sold down the line, when market conditions have stabilised and banks have loosened their purse strings, sources said yesterday.

Two groups of private equity firms were due to submit second-round bids for Cadbury’s drinks arm at the end of July and Cadbury had hoped to announce a preferred bidder at its interim results earlier this month.

But the sale, which is being handled by Morgan Stanley, Goldman Sachs and UBS, ran into trouble after the banks were forced to lower the amount of debt – called staple financing – available for the deal.

The banks had originally agreed to lend on a multiple of 9.5 times Cadbury’s earnings before interest, tax, depreciation and amortisation.

But they were forced to reduce that to 8.5 times, as jitters over high-risk leveraged loans spread. As a result, the price tag for the Cadbury business was believed to have dropped by as much as £1 billion – to about £7 billion.

The first bidding group included Bain Capital Partners, Thomas H Lee Partners and TPG. A second involved Blackstone, Kohlberg Kravis Roberts and Lion Capital.

Shares of Cadbury closed down 19½p yesterday at 556p.

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