Keurig Bets $19 Billion on Soda -- WSJ
K-Cup maker hopes deal puts its bottled drinks in more stores; record soft-drink deal
By Cara Lombardo and Zeke Turner
This article is being republished as part of our daily reproduction of WSJ.com articles that also appeared in the U.S. print edition of The Wall Street Journal (January 30, 2018).
The maker of Keurig coffee machines is taking over Dr Pepper Snapple Group Inc., a marriage that combines popular brands that have struggled with increased competition and shifting consumer tastes.
The transaction, which would pay nearly $19 billion in cash to Dr Pepper Snapple investors, is the biggest nonalcoholic drinks deal on record, according to Dealogic. It would create a new public company with about $11 billion in annual sales and more than $16 billion in debt.
Keurig's K-Cup coffee pods and single-serve machines redefined the U.S. market, but growth has slowed amid competition from private-label pods. Dr Pepper Snapple has been slower than its soda rivals to diversify its lineup, which includes Sunkist and 7UP, as consumers switch away from sugary drinks.
Executives said the deal would put bottled Keurig coffee drinks in more stores and result in $600 million in annual savings. "To continue to prosper as a company within this space, you need to be able to offer multiple beverage formats, multiple beverage brands and to be able to deliver those brands across platforms," said Bob Gamgort, who is Keurig's chief executive and will run the combined company.
But some analysts questioned the logic behind the deal, saying the two companies could have accomplished the same goals without combining.
The transaction is being driven by JAB, one of Europe's biggest investment firms, which took control of Keurig two years ago in a $13.9 billion deal. JAB 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 deal would give JAB control of a newly public company, Keurig Dr Pepper, that it could use to strike additional deals and raise the profiles of its other brands, analysts said. Shareholders of Dr Pepper Snapple would own about a 13% stake in the merged company, which would be listed on the New York Stock Exchange.
Mr. Gamgort said in an interview that Keurig would 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 would ramp up Keurig's competition with Starbucks Corp., whose bottled drinks dominate the market and are distributed by PepsiCo Inc. Coca-Cola began distributing a line of Dunkin' Donuts bottled iced coffee last year.
But it also puts Keurig into the global soda business, which has been shrinking. 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 Dr Pepper, A&W and other soda brands.
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. It acquired Dr Pepper/Seven Up in 1995 and Snapple Beverage in 2000. But 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 2017, sales of ready-to-drink coffees jumped more than 17%, according to Euromonitor.
Under the terms of the deal, Dr Pepper Snapple shareholders would receive a cash dividend of $103.75 a share. Dr Pepper shares surged 22% Monday to $117.07, closing with a market value of $21.6 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 $29 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 deals in recent years across food, retail and consumer-products companies with cash from investors including Stanford University's endowment and GIC Private Ltd., the sovereign-wealth fund from Singapore.
JAB would contribute $9 billion in equity plus its stake in Keurig in the deal. Snack giant Mondelez International Inc., JAB's partner in Keurig, would 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. nonalcoholic beverage 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. It had estimated revenue of $6.7 billion in 2017.
Keurig Green Mountain had estimated revenue of $4.1 billion in 2017. Sales of its coffee pods aren't increasing at the rapid rate they once were and the company went from controlling more than 40% of the coffee-pod business in 2013 to around 23% in 2017, according to Mr. Zuanic. Keurig said coffee-pod sales increased around 5% in the second half of 2017 after it lowered prices and added new brands.
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 Ali Dibadj, an analyst at Bernstein analyst, questions whether the deal was necessary 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 approval from regulators and Dr Pepper shareholders.
Write to Cara Lombardo at email@example.com and Zeke Turner at Zeke.Turner@wsj.com
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January 30, 2018 02:47 ET (07:47 GMT)Copyright (c) 2018 Dow Jones & Company, Inc.