Coverage: Keurig maker to combine with Dr Pepper Snapple

Dr Pepper Snapple Group is merging with Keurig Green Mountain to create beverage giant with an estimated $11 billion in annual revenues, the companies said Monday.

Kevin McCoy and Zlati Meyer of USA Today had the story:

The deal brings together some of the soft drink and juice world’s best known names —   Dr Pepper, 7UP, Snapple, A&W, Mott’s, Sunkist and Hawaiian Punch — with Green Mountain Coffee Roasters, Keurig’s single-serve coffee systems, and more than 75 other brands connected to the Keurig system, including Original Donut Shop Coffee.

The combined company will be called Keurig Dr Pepper. Together, the two companies hope their combined heft will give them more leverage in the marketplace.

“KDP will be a total beverage solution that provides options across all consumer needs and occasions, whether they are at work, at play or on the go,” said Dr Pepper Snapple CEO Larry Young, who plans to stay on during the transition and will serve on the new company’s board of directors. “The combined organization will unlock opportunities for growth across the entire beverage space.”

Transaction terms call for Dr Pepper Snapple shareholders to receive a cumulative cash payment of roughly $18.7 billion, based on the company shares reported outstanding in late October.

Lauren Hirsch of CNBC.com reported that Keurig’s parent also owns Panera and Caribou Coffee:

The deal is the latest backed by Austrian investment firm JAB Holding Company, which has been steadily compiling a lunch and breakfast empire. JAB, which acquired Keurig Green Mountain in 2016, also owns Panera, Caribou Coffee and other breakfast and coffee concepts.

The deal forges a path for JAB to be an acquirer and major distributor of drinks in the U.S.

In a change of course from its previous acquisitions, JAB is keeping Dr Pepper partially a public company. The new entity will be 87 percent owned by Keurig shareholders and 13 percent owned by Dr Pepper shareholders. With a public float, Keurig has easier access to cash for more acquisitions down the road.

“The public component gives us a broader toolkit that we could use for a consolidation going forward, allows us to think of some creative structures in that space and it also over time provides some liquidity if some of our private partners need to exercise some liquidity in an organized fashion,” the company told investors, according to a transcript from FactSet.

Brooke Sutherland of Bloomberg Gadfly reports that the deal aims to do what Coca-Cola could not — combine hot and cold:

The pitch is eerily reminiscent of what Coke said as it backed the Keurig Kold venture. “It’s all about the choice,” former Coke CEO Muhtar Kent said in 2015. The soda company has to be a bit frustrated as JAB essentially takes its initial strategy with Keurig and runs with it. Many had speculated Coke’s stake was a precursor to an eventual Keurig buyout. Instead, Coke made a small profit of about $25.5 million in the JAB buyout and moved on.

There’s no guarantee that JAB will do any better than Coke did at integrating hot and cold beverages; it’s worth noting that Dr Pepper was also a partner in the flopped Keurig Kold, although to a lesser extent financially than Coke. But JAB does seem to have made decent progress in getting Keurig on better financial footing. While net sales have declined over the past two years as a result of price reductions, Keurig is selling more of its pods and has machines in more households. Keurig has also been able to improve its operating margin by cutting costs.

JAB’s java forays have given it the nickname “the Budweiser of Coffee.” As it muscles in to other parts of the beverage industry, Coke should prepare a counter-move.