What Keurig-Dr Pepper Merger Means for Industry

The maker of Keurig coffee machines is acquiring Dr Pepper Snapple Group Inc. (DPS) in a deal that gives shareholders $19 billion in cash and continues the hot beverage giant's acquisition spree brought on by JAB, one of Europe's largest investment firms. The deal demonstrates the ongoing disruption in the food and beverage industry as it scrambles for meaningful mergers and acquisitions. While major brands have been gobbling up smaller startups, the Keurig-Dr Pepper deal would mark the largest soft-drink deal in history. 

JAB, which took control of Keurig Green Mountain Inc two years ago, has shelled out more than $40 billion in the past decade to acquire food player such as Peet's Coffee, Panera Bread and Krispy Kreme Doughnuts. The most recent transaction, which will give DPS shareholders a 13% stake in the merged entity, will offer JAB control of a newly public company that it can use to ink additional deals. 

DPS, the maker of 7UP, Canada Dry and Mott's has doubled down on high-growth businesses such as premium and sparkling water amid a larger industry shift away from sugary soda products. Consumer health trends drove soda sales down for the 12th consecutive year in 2016, justifying Dr Pepper's decision to acquire antioxidant infused water brand Bai Brands for $1.7 billion. Despite its efforts, DPS, which has about 8.5% of the U.S. non-alcoholic beverage market, has been the slowest to diversify its offerings alongside market leaders Coca Cola Co. (KO) and PepsiCo Inc. (PEP). Keurig, known for its coffee K-Cups, will give DPS exposure to the high-flying coffee segment, which saw sales of ready-to-drink coffee jump 17% year-over-year (YOY) in 2017, according to Euromonitor. 

Running Hot and Cold Businesses

Keurig, geared with a fast pass to get its bottled coffee drinks out at retailers, will face off against market leader Starbucks Corp. (SBUX), whose bottled drinks are distributed by Pepsi. The combined company's new CEO, Keurig's Bob Gamgort, says DPS's distribution network will help market drinks such as Peet's Coffee and Forto coffee shops, while Keurig's online presence will boost sales of Dr Pepper products through platforms such as Amazon.com Inc. (AMZN).

Analysts at Macquarie expect the new company to gain a major edge on its bolstered distribution capabilities and range of hot and cold beverages. "Its always been a two-horse race with Coke and Pepsi," said analyst Caroline Levy. "I wouldn't be surprised to see this entity pull ahead of Pepsi in the beverage business." 

Taking a more bearish stance, Bernstein analyst Ali Dibadj warned on the deal's potential implications for Dr Pepper's distribution arrangements with Coke and Pepsi, estimating that they will account for roughly 15% of the new company's earnings before interest or taxes.  Shares of Dr Pepper spiked on Monday as much as 25% before closing down less than 0.1% at $117.07. (See also: The Top Beverage Stock Picks Right Now: Credit Suisse.)