The maker of Keurig coffee machines is acquiring Dr Pepper Snapple Group Inc. in a deal that will give shareholders of the soda maker nearly $19 billion in cash and go down as one of the largest beverage deals in years.
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The merger brings Dr Pepper brands such as 7UP, A&W root beer and Bai under the same roof as Keurig Green Mountain Inc.'s single-serve coffee systems and affiliated brands including Green Mountain Coffee Roasters. The combined entity would have $11 billion in annual revenue, the companies said.
Soda giants including Dr Pepper Snapple, PepsiCo Inc. and Coca-Cola Co. have been racing to expand their portfolios of less-sugary drinks such as juices, sparkling waters, coffees and teas. Coffees and teas in particular have been among the fastest-growing beverage categories in recent years.
The deal shows Keurig's owner, the European investment vehicle JAB, moving aggressively to expand from its coffee business into sodas and ready-to-drink beverages as big brands adjust to changing consumer tastes.
The new combined company, Keurig Dr Pepper, will be traded on the New York Stock Exchange. It will be 87% owned by Keurig and 13% owned by Dr Pepper Snapple shareholders. Keurig CEO Bob Gamgort will run the combined company.
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 28% in early trading Monday. Dr Pepper had a market value of $17 billion based on Friday's closing price.
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Both companies were formed over the years through a series of mergers, though the latest transaction would create a seller of both hot and cold beverages.
Keurig was taken private in 2016 following its $13.9 billion acquisition by a group of investors led by JAB. The privately held fund manages the money of the Reimann family, one of Germany's wealthiest, and 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.
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.
JAB also has a stake in cosmetics giant Coty Inc. and owns Krispy Kreme Doughnuts and bakery chain Panera. JAB largely buys these companies and then allows them to operate independently after taking them private.
JAB 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.
Wells Fargo analyst Bonnie Herzog estimates the combined company could be valued at about $33 billion.
Plano, Texas-based Dr Pepper is one of the largest nonalcoholic beverage companies in the U.S. by sales volume. Of the major soda companies, Dr Pepper has been the slowest to diversify its offerings: In 2016, about 80% of its annual revenue still came from soft drinks.
"We are the first company to combine hot and cold beverages at scale, and we believe we can effectively participate in ongoing consolidation in the industry," Mr. Gamgort said on a conference call with analysts. The companies expect $600 million of annual savings by 2021.
Keurig has tried to sell cold beverages before. It invested heavily to develop a pod-based machine that could brew cold carbonated beverages, including Coca-Cola and Dr Pepper, at home. But the company pulled the Kold machine in mid-2016 after less than a year on the market amid weak sales.
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."
The companies expect the deal to close in the second quarter, subject to the approval of Dr Pepper shareholders and regulatory approval.
Write to Cara Lombardo at email@example.com and Zeke Turner at Zeke.Turner@wsj.com
(END) Dow Jones Newswires
January 29, 2018 10:15 ET (15:15 GMT)