1-29-18 1:34 PM EST | Email Article
By Cara Lombardo and Zeke Turner 

The maker of Keurig coffee machines is acquiring Dr Pepper Snapple Group Inc., a takeover that will give shareholders nearly $19 billion in cash, blur the lines between makers of hot and cold beverages and go down as the largest soft-drink deal ever.

The transaction is being driven by JAB, one of Europe's biggest investment firms, which took control of Keurig two years ago and has spent more than $40 billion over the past decade to scoop up coffee and U.S. restaurant brands, including Peet's Coffee, Panera Bread and Krispy Kreme Doughnuts.

The complex transaction will give JAB control of a newly public company, Keurig Dr Pepper, that it could use to continue to strike additional deals and make investments, analysts said. Shareholders of Dr Pepper Snapple will own about a 13% stake in the merged company, which will be listed on the New York Stock Exchange.

The deal is estimated to be worth $18.9 billion, excluding debt, according to Dealogic, which said it would top the previous record for a soft-drink acquisition -- JAB's 2015 takeover of Keurig Green Mountain for $13.9 billion.

The combination gives Keurig, best known for its K-Cup coffee systems, an express lane to get its bottled coffee drinks into coolers at convenience stores, drugstores and other retailers at a time when ready-to-drink coffee sales are growing rapidly.

Keurig CEO Bob Gamgort, who will run the combined company, said in an interview that he will use Dr Pepper's distribution network to market drinks such as Peet's Coffee and Forto coffee shots and use Keurig's online presence to sell more Dr Pepper drinks through retailers such as Amazon.com Inc.

The deal also puts Keurig into the global soda business, which has been struggling as consumers shift away from sugary drinks. Keurig's previous attempt to crack the market, a countertop pod-based machine called KOLD that could make Coca-Cola and Dr Pepper, flopped. Mr. Gamgort said Keurig wasn't planning to revive the device, despite taking over Sunkist, 7UP and other soda brands.

"We're building a company that starts with the consumer, understands their fundamental needs and then is capable of delivering the brands and formats in all the places the consumers shop," he said.

Mr. Gamgort, a former executive at Pinnacle Foods and Mars Inc., will be based in Burlington, Mass. Dr Pepper will continue to operate out of Plano, Texas and Keurig will remain in Waterbury, Vt. Dr Pepper CEO Larry Young plans to join the new company's board.

The company would have $11 billion in annual revenue, the companies said. It also would have about $16.6 billion in debt. Wells Fargo analyst Bonnie Herzog estimates the combined company would be valued at about $33 billion.

Dr Pepper Snapple, which dates itself to 1783 when Jean Jacob Schweppe created one of the world's first carbonated mineral waters, has been through a series of owners over the years. In 1995, it acquired Dr Pepper/Seven Up and in 2000 it acquired Snapple Beverage. But with $6.4 billion in annual revenue in 2016, it is still dwarfed by the biggest beverage players, Coca-Cola Co. and PepsiCo Inc.

All three soda giants have been racing to get a piece of growing markets for juices, sparkling water, coffee and tea. Coffees and teas in particular have been among the fastest-growing beverage categories in recent years. In 2017, sales of ready-to-drink coffees jumped more than 17%, according to Euromonitor.

Under the terms of the deal, Dr Pepper Snapple shareholders will receive a cash dividend of $103.75 a share. Dr Pepper shares, which closed at $95.65 on Friday, surged 24% in Monday afternoon trading, giving it a market value of $21.4 billion. Dr Pepper had a market value of $17 billion based on Friday's closing price.

"We think the public listing for [Keurig] is the main reason for the deal," giving JAB a currency for more acquisitions and a way to cash in some of its investment, said analyst Pablo Zuanic, at Susquehanna Financial Group. He estimates the remaining 13% stake in the company is worth about $24.50 a share by December 2018 based on his earnings estimates and valuation of its peers.

JAB is a privately held fund that manages the money of the Reimann family, one of Germany's wealthiest. It has brought in a crop of new money through its JAB Consumer Fund, fueling some $40 billion in deals in recent years across food, retail and consumer-products companies with cash from investors like Stanford University's endowment and GIC Private Ltd., the sovereign-wealth fund from Singapore.

The investment group is led by three men with decades of experience in the consumer-goods business, including OIivier Goudet, a former chairman of AB InBev and chief financial officer for Mars Inc., and Bart Becht, who worked at Procter & Gamble Co. and ran Durex condom maker Reckitt Benckiser Group PLC.

Alongside its two main business areas -- drink-at-home coffee and its restaurants and donut shops -- JAB also has a stake in cosmetics giant Coty Inc. JAB largely buys these companies and then allows them to operate independently after taking them private.

JAB will contribute $9 billion in equity plus its stake in Keurig in the deal. It will be the controlling shareholder in Keurig Dr Pepper. Snack giant Mondelez International Inc., JAB's partner in Keurig, will hold a roughly 13% to 14% stake in the combined company, down from around a 24% stake currently.

Dr Pepper has about 8.5% of the U.S. non-alcoholic beverage market and 2% of the global market, according to the consultancy Euromonitor International. Of the three major soda companies, Dr Pepper has been the slowest to diversify its offerings and in 2016, about 80% of its annual revenue still came from soft drinks. Last year it bought Bai Brands, a maker of antioxidant drinks, for $1.7 billion.

Keurig Green Mountain had $1.74 billion in revenue in 2016, according to Euromonitor, and about 7.4% of the U.S. hot-drinks market and 1.3% of the global market. As a private company, Keurig hasn't reported earnings.

The companies expect $600 million of annual cost savings by 2021.

Macquarie analyst Caroline Levy said she expects the new company's distribution capabilities and combination of hot and cold offerings to give it a competitive advantage. "It's always been a two-horse race with Coke and Pepsi," she said. "I wouldn't be surprised to see this entity pull ahead of Pepsi in the beverage business."

But Bernstein analyst Ali Dibadj questions the logic of the deal and worries about its potential impact on Dr Pepper's distribution arrangements with Coca-Cola and PepsiCo, which he estimates will account for about 15% of the new company's earnings before interest or taxes.

The companies expect the deal to close in the second quarter, subject to the approval of Dr Pepper shareholders and regulators.

Write to Cara Lombardo at cara.lombardo@wsj.com and Zeke Turner at Zeke.Turner@wsj.com


(END) Dow Jones Newswires

January 29, 2018 13:34 ET (18:34 GMT)

Copyright (c) 2018 Dow Jones & Company, Inc.
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