Shares of Dr Pepper Snapple Group Inc. DPS soared more than 22% on Jan 29 after news came out that the beverage company will be acquired by coffee-maker Keurig Green Mountain, Inc.
Terms of the Deal
Per the terms of the transaction, which has been approved by Dr Pepper Snapple’s board of directors, the company’s shareholders will receive a special cash dividend of $130.75 per share, making the deal worth $18.7 billion. Dr Pepper Snapple’s shareholders will retain 13% ownership of the combined entity, while Keurig shareholders will own the remaining 87%.
European investment fund JAB Holding, which helped take Keurig private for $13.9 billion in 2016, will make a $9 billion equity investment as a part of the transaction financing, and will be the controlling shareholder when the transaction closes in the second quarter of 2018. Meanwhile, snack giant Mondelez International Inc. MDLZ — JAB Holding's partner in Keurig — is slated to have about 13-14% stake in the merged entity.
Both Keurig and Dr Pepper Snapple will continue to operate from their respective headquarters, and their leadership will run their businesses.
Dr Pepper Snapple Group, Inc Price
Dr Pepper Snapple Group, Inc Price | Dr Pepper Snapple Group, Inc Quote
Keurig Dr Pepper’s Impact on the Industry
The new company, known as Keurig Dr Pepper, will have $11 billion in combined pro forma revenues and will realize $600 million in synergies on an annualized basis by 2021, per the companies. The merger creates a portfolio that contains a number of iconic beverage companies that includes Dr Pepper, 7UP, Snapple, A&W root beer, Mott’s apple juice, Sunkist and Green Mountain Coffee Roasters, which includes the Keurig single-serve coffee business.
The combined company's new CEO, Keurig's Bob Gamgort, says that Dr Pepper Snapple's distribution network will help market drinks such as Peet's Coffee and Forto coffee shops, while Keurig's online presence will boost sales of Dr Pepper Snapple’s products through digital platforms like Amazon.com Inc. As such, the Keurig-Dr Pepper deal would mark the largest soft-drink deal in history.
Overall, the deal is likely to push JAB Holdings into escalating competition with beverage giants like of Coca-Cola Co. KO and PepsiCo Inc. PEP.
The deal primarily validates the ongoing trouble in the food and beverage industry. Changing demographics and purchasing behaviors make it important for beverage industry giants to understand and capitalize on main consumer insights that identify growing trends. Health awareness has been prime concern for consumers in recent times and capitalizing on this trend can prove to be beneficial for any beverage company.
Continuing decline in carbonated soft drinks or CSDs and impressive growth in noncarbonated beverages are creating headaches for many established players like PepsiCo, Coca-Cola, and Dr Pepper Snapple, leading to lower volumes and weak sales. Among CSDs, the cola segment particularly has been facing challenges, as consumers are opting for alternatives. Also, potential new taxes on sugar-sweetened beverages and growing regulatory pressures are affecting CSD sales. This shift in consumer preferences resulted in Dr Pepper Snapple’s soda sales declining for the12th consecutive year in 2016.
In order to combat this weakness, the company added Bai Brands in January 2017 to its priority portfolio, one of the fastest growing beverage brands that offer a family of premium better-for-you beverages. However, despite its efforts, Dr Pepper Snapple has about 8.5% of the U.S. non-alcoholic beverage market and has been the slowest to diversify its offerings alongside market leaders Coca Cola Co. and PepsiCo Inc., according to the consultancy Euromonitor International.
In the words of Keurig CEO Bob Gamgort, “Our view of the industry through the lens of consumer needs, versus traditional manufacturer-defined segments, unlocks the opportunity to combine hot and cold beverages and create a platform to increase exposure to high-growth formats.”
Dr Pepper Snapple holds a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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