The board of Cadbury Schweppes is planning a £12.6 billion break-up of the company that is likely to involve the sale of its £6.5 billion drinks business, The Times has learnt.

It is understood that Nelson Peltz, the American corporate raider who yesterday revealed he had acquired a 2.98 per cent stake in the company, has already held talks with Cadbury’s senior management.

Last week he contacted the company and set out his plans to separate the company’s two main businesses — beverages and confectionery — as a way of extracting greater value for shareholders.

Cadbury has since instructed its bankers, Morgan Stanley, Goldman Sachs and UBS, to prepare for a possible break-up as the best way to defend against any possible hostile activity or a takeover bid for the entire group.

Cadbury has for years rejected the idea despite pressure from investors frustrated by the group’s relatively weak earnings growth. It is understood to be considering spinning off the beverages arm, which includes brands such as Dr Pepper and 7-Up.

The unit, which operates in the Americas and Australia and generated sales of about £3 billion last year, is profitable and highly cash-generative. However, it has lower growth opportunities than Cadbury’s historic confectionery business.

It is thought to be unlikely that Mr Peltz will be offered a position on Cadbury’s board.

The most likely buyers of Cadbury’s beverages arm, worth more than £6.5 billion according to Investec, would be private equity firms. Its two biggest rivals, Coke and Pepsi, would be precluded from bidding on competition grounds.

A sale to a joint trade/private equity bidder or possibly an initial public offering are possible.

Shares in Cadbury Schweppes soared 10.5 per cent yesterday to 602p after news of Mr Peltz’s share purchase.

The US food giants Kraft and Hershey have been named as potential buyers of the confectionery business. Both declined to comment yesterday.

Cadbury said it had learnt of the share buy in the last few days, but declined to comment further.

Additional reporting by Tom Bawden and Christine Seib

Peltz takes a bite out of Cadbury

Separating the fruit from the nuts... how to break up the business

— Confectionery

Est. 2006 profits: £570m

Brands: Dairy Milk; Flake; Trident chewing gum; Dentyne chewing gum; Bubblicious; Green & Blacks; Cream Egg; Trebor Bassett; Hall’s

Likely buyers: Hershey's or Kraft

— Beverages

Est 2006 profits: £503m

Brands: Schweppes; Snapple; Canada Dry; A&W Root Beer; Sunkist;Dr. Pepper; 7-Up

Private equity firms such as Lion Capital, Blackstone or KKR. An IPO is also a possibility

— Cadbury Schweppes

Founded 1905

Revenues: £7.4bn in 2006

2006 Underlying Profits: £1,073m

Net debts: £2.9bn

Employees: 59,000

Market capitalisation: £12.2bn

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