Keurig to Acquire Dr Pepper Snapple in Largest Soft-Drink Deal Ever -- 2nd Update

Dr Pepper Snapple Inc. will merge with Keurig Green Mountain Inc. to merge to create a new beverage company with about $11 billion of combined revenue, the drink companies said Monday.

The deal brings Dr Pepper brands such as 7UP, A&W root beer and Bai under the same roof as Keurig's single-serve coffee systems and 75 other Keurig-related brands including The Original Donut Shop coffee and Green Mountain Coffee Roasters.

Under the terms of the deal, Dr Pepper Snapple shareholders will receive a special cash dividend of $103.75 a share and retain 13% of the combined company. Dr Pepper shares, which closed at $95.65 on Friday, rose 35% in premarket trading Monday.

Keurig was taken private in 2016 following its acquisition by a group of investors led by European investment fund JAB Holding Co. JAB says about 20% of U.S. households use Keurig systems.

The deal would make JAB will become the controlling shareholder in the combined company, Keurig Dr Pepper. Snack giant Mondelez International Inc., JAB's partner in Keurig, will hold a roughly 13% to 14% stake in the firm.

Dr Pepper Snapple Chief Executive Larry Young said in prepared remarks that the deal will allow the companies to react to a fast-changing industry landscape with hot and cold beverages that will satisfy every consumer throughout the day.

Soda giants including Dr Pepper Snapple, PepsiCo Inc. and Coca-Cola Co. have been racing to expand their portfolios of healthier-seeming drinks such as ready-to-drink coffees and teas, which have been some of the fastest-growing beverage categories in recent years.

Dirk Van de Put, CEO of Mondelez International, called the new company a "powerful beverage platform."

The deal, expected to close in the second quarter of this year, is subject to the approval of Dr Pepper Snapple shareholders and other closing conditions.

Write to Cara Lombardo at cara.lombardo@wsj.com

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

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.

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.

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 cara.lombardo@wsj.com and Zeke Turner at Zeke.Turner@wsj.com

(END) Dow Jones Newswires

January 29, 2018 18:56 ET (23:56 GMT)