Dr Pepper and Keurig merger expected to create disruptive beverage giant
29 Jan 2018 --- Dr Pepper Snapple Group, Inc and Keurig Green Mountain, Inc have entered into a definitive merger agreement to create Keurig Dr Pepper (KDP), a new large-scale beverage company with a portfolio of iconic consumer brands and unrivaled distribution capability to reach virtually every point-of-sale in North America.
Under the terms of the agreement, which has been unanimously approved by the Dr Pepper Snapple Board of Directors, Dr Pepper Snapple shareholders will receive US$103.75 per share in a special cash dividend and retain 13 percent of the combined company.
KDP will have pro forma combined 2017 annual revenues of approximately US$11 billion and a huge portfolio of beverages. However, the new combined company is still nowhere near the size of competitors Coca-Cola and PepsiCo.
Keurig is a beverage brewing system for home and commercial use with K-Cup pods, which are single-serve coffee containers. Keurig beverage varieties include hot and cold coffees, teas, cocoas, dairy-based beverages, lemonades, cider, and fruit-based drinks. Through its own brands and its partnership licensed brands, Keurig has more than 400 different varieties and over 60 brands of coffee and other beverages.
Iconic companies joining forces to create a new beverage giant
The combination of two iconic beverage companies joins together popular brands Dr Pepper, 7UP, Snapple, A&W, Mott’s and Sunkist with the leading coffee brand Green Mountain Coffee Roasters and the innovative Keurig single-serve coffee system, as well as more than 75 owned, licensed and partner brands in the Keurig system.
“This transaction will deliver significant and immediate value to our shareholders, along with the opportunity to participate in the long-term upside potential of our combined company and attract new brands and beverage categories to our platform in a fast-changing industry landscape,” President and Chief Executive Officer of Dr Pepper Snapple Larry Young said in a statement.
“We are excited to combine with Keurig to build on the rich heritage and expertise of both companies and provide the highest-quality hot and cold beverages to satisfy every consumer throughout the day.”
Under the terms of the merger, both companies will create a drinks giant offering traditional sodas, better-for-you beverages and popular coffee drinks.
“Our view of the industry through the lens of consumer needs, versus traditional manufacturer-defined segments, unlocks the opportunity to combine hot and cold beverages and create a platform to increase exposure to high-growth formats,” said Bob Gamgort, Chief Executive Officer of Keurig.
“The combination of Dr Pepper Snapple and Keurig will create a new scale beverage company which addresses today’s consumer needs, with a powerful platform of consumer brands and an unparalleled distribution capability to reach virtually every consumer, everywhere.”
“We are fortunate to have talented leadership teams within both companies, and I look forward to working together with the Dr Pepper Snapple team to make this combination a success for all of our stakeholders.”
Bart Becht, Partner and Chairman of JAB Holding Company and Chairman of Keurig, says he is very excited about the prospect of KDP becoming a challenger in the beverage industry.
“Management’s proven operational and integration track record along with their commitment to innovation and potential future brand consolidation opportunities, while maintaining an investment grade rating, positions the company well for long-term success and material shareholder value creation,” he said.
Dirk Van de Put, CEO of Mondelēz International, which will have a significant stake in KDP, added: “We have been very pleased with our coffee partnership with Keurig, and strongly support the strategic rationale for this transaction.”
“We look forward to continuing to participate in the compelling value-creation and long-term growth opportunities inherent in this powerful beverage platform.”
Value for shareholders
KDP believes its complementary portfolio, access to high-growth segments of the beverage industry and shareholder value-focused management team will enable it to achieve sustained growth through continued innovation, brand consolidation opportunities and enhanced household penetration for its leading brands.
KDP targets realizing US$600 million in synergies on an annualized basis by 2021, while Dr Pepper Snapple expects to pay its first-quarter ordinary course dividend of US$0.58 per share.
At the close of the transaction, the company expects to deliver an annual dividend of US$0.60 per share.
Keurig performance update
The deal is backed by German privately held conglomerate, investment firm JAB Holding Company, which has been growing its portfolio in recent years.
JAB acquired Keurig Green Mountain in 2016 and it also owns Panera, Caribou Coffee Company, among other breakfast and coffee concepts.
JAB’s portfolio also includes a minority stake in the consumer products company Reckitt Benckiser and a majority stake in San Francisco Bay-area based specialty coffee roaster and retailer, Peet’s Coffee & Tea, as well as a majority stake in Dutch beverage firm, Jacobs Douwe Egberts.
Since its acquisition by a JAB-led investor group in March 2016, Keurig has renewed its marketing investment and improved its new brewer innovation pipeline. This has resulted in renewed top-line volume growth, increasing US household penetration for Keurig brewers from 17 percent to 20 percent in the last two years.
Over the same period, Keurig has added key brand partners into the Keurig system with the help of strategic pod price reductions and value-added services. The combination of those two factors has allowed the company to improve its pod growth from the low-single digits to mid-single digits in the second half of the calendar year 2017.
Upon closing of the transaction, Keurig shareholders will hold 87 percent and Dr Pepper Snapple shareholders will hold 13 percent of the combined company.
The global investment firm, JAB Holding Company, and its partners will together make an equity investment of US$9 billion as part of the financing of the transaction. JAB will be investing equity capital from JAB Holding Company as well as through JAB Consumer Fund, an investment fund backed by a group of like-minded, long-term oriented investors.
Management and governance
Bob Gamgort, the current chief executive officer of Keurig, will serve as a chief executive officer of the combined company and Ozan Dokmecioglu, the current chief financial officer of Keurig, will serve as its chief financial officer.
Dr Pepper Snapple President and CEO Larry Young intends to transition to a role on KDP’s Board of Directors to help the new management team realize the full potential of the company.
Bart Becht, of JAB, will serve as Chairman of the company’s Board of Directors and Bob Gamgort will become an Executive Member of the Board. Four additional directors will be appointed by JAB, two directors will be appointed by Dr Pepper Snapple, including Young, two directors will be appointed by Mondelēz International, and two independent directors will be appointed.
Keurig and Dr Pepper Snapple will continue to operate out of their current locations and Bob Gamgort, CEO of the combined company, will be based in Massachusetts, US.
In the past, the international not-for-profit CDP has included Nestlé in its supplier engagement leaderboard. CDP focuses investors, companies and cities on taking urgent action to build a truly sustainable economy by measuring and understanding their environmental impact.
Nestlé is one of 58 companies included out of a total of 3,300 assessed, putting it among just 2 percent awarded a place.
The Swiss transnational food and drink company has committed to showing climate change leadership as part of its goal of enhancing the quality of life and contributing to a healthier future.
Other “supplier engagement leaders” from the food and beverage industry include Coca-Cola, Kellogg, Unilever and Ajinomoto, while other recognized corporations came from the auto, financial and tech industries.
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