It looks like Keurig Green Mountain wants to be a Pepper too.

The privately held coffee company known for its K-Cup single-serve coffee pods has entered into a merger agreement with Dr Pepper Snapple Group (NYSE: DPS). Under the terms of the deal, Dr Pepper Snapple shareholders will receive $103.75 per share in a one-time cash dividend and retain 13% of the combined company. The remainder will be owned by Keurig's parent, privately held JAB Holding Co.

The new entity, Keurig Dr Pepper, will have approximately $11 billion in annual sales. It will be run by current Keurig CEO Bob Gamgort, while Dr Pepper Snapple CEO Larry Young will become a member of its board.

"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," said Gamgort in a press release.

Why is this happening?

The two companies have complementary product portfolios, and the combined entity should operate more efficiently. Once the transaction is finalized, the company expects to deliver $600 million in synergies on an annualized basis by 2021.

At the close of the transaction, Keurig Dr. Pepper will have $16.6 billion in debt. It expects to be able to accelerate deleveraging partly through the cost-savings mentioned above.

"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," said Young.

Will it work?

Both companies already have strong presences in grocery stores, but bigger is generally better when dealing with retailers, so the added scale should benefit the combined operation. In addition, Keurig Dr Pepper should be able to extend the reach of all of its brands by leveraging the relationships that each partner brings to the table.

There will, of course, be integration challenges, but the fact that the companies' product lines don't overlap should allow them to sidestep at least some of the potential problems.

10 stocks we like better than Wal-Mart
When investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, the Motley Fool Stock Advisor, has tripled the market.*

David and Tom just revealed what they believe are the ten best stocks for investors to buy right now... and Wal-Mart wasn't one of them! That's right -- they think these 10 stocks are even better buys.

Click here to learn about these picks!

*Stock Advisor returns as of January 2, 2018
The author(s) may have a position in any stocks mentioned.

Daniel B. Kline has no position in any of the stocks mentioned.

Want to learn how to invest?

Get a free 10 week email series that will teach you how to start investing.

Delivered twice a week, straight to your inbox.