On January 29th, 2018, Keurig Green Mountain and Dr. Pepper Snapple Group announced an $18.7 billion merger, creating an $11 billion revenue company: Keurig Dr. Pepper. Dr. Pepper Snapple shareholders will receive a cash dividend of $103.75 per share. After the deal was announced, Dr. Pepper Snapple’s shares rose 22% to $117.07, with a market value of $21.6 billion (compared to a market value of $17 billion pre-announcement). DPS’ shareholders will own 13% of the new company, Mondelez International will own 13-14%, and JAB will own the remaining 74%. The merger will create $600 million in annual cost-savings, and is expected to close in the second quarter.
Keurig Green Mountain is a specialty coffee and coffeemaker company that sells various beverages in both bags and portion packs for its Keurig brewing systems. Dr. Pepper Snapple is a soft drink company that controls 8.5% of the U.S. nonalcoholic beverages market. The transaction is driven by one of Europe’s largest investment firms, JAB, which is a privately held fund that manages the money of one of the Reimann family – one of Germany’s wealthiest families. The firm acquired Keurig two years ago in a $13.9 billion deal; and it has been active in the coffee and restaurant space, acquiring other brands, such as Peet’s Coffee, Panera Bread, Au Bon Pain, and Krispy Kreme Doughnuts, over the past decade. Additionally, it recently raised the JAB Consumer Fund, focusing on deals in food, retail, and consumer-products companies with investors including Stanford University’s endowment and GIC Private Ltd., (Singapore’s sovereign-wealth fund). This deal would potentially raise the profiles of JAB’s other brands as well. The firm will invest $9 billion of equity into the merger, as well as its stake in Keurig. Mondelez International – a snack company and JAB’s partner in Keurig – will lower its stake in the merged company from 24% to 13%.
The move is an attempt to help both Keurig and Dr. Pepper diversify its portfolio, as both brands have faced difficulties with increased competition and changing consumer preferences in the beverage market. For example, while Keurig’s K-Cup coffee pods and single-service machines had a huge impact on the U.S. beverage market, competition from private-label pods has slowed Keurig’s growth. While Keurig owned 40% of the coffee-pod business in 2013, its share dropped to 23% in 2017. The merger puts Keurig into the global soda business, which is a shrinking industry and one that Keurig has previously tried to reach. In 2016, the company began selling the KOLD, a countertop pod-based soda machine, which it promptly discontinued.
Keurig is looking to leverage Dr. Pepper’s distribution network to grow sales of bottled Keurig drinks such as Forto coffee shots, as sales of ready-to-drink coffees increased more than 17% in 2017. With this new strategy, the company hopes to more fiercely compete with Starbucks, whose bottled drinks dominate the U.S. market and are distributed by PepsiCo Inc.
Dr. Pepper Snapple is also aiming to diversify through the merger, as consumers begin drinking fewer sugary drinks. The company has responded to the change slower than its rivals (ex. Sunkist and 7UP) – 80% of its revenues in 2016 still came from soft drinks. It will likely use Keurig’s online presence to sell more drinks through retailers such as Amazon. However, the merger could potentially have an impact on Dr. Pepper’s distribution arrangements with Coca-Cola and PepsiCo, which will contribute to approximately 15% of the new company’s EBIT.
The deal will add to JAB’s already strong portfolio and help it leverage its expertise across the various companies it owns. The food and beverage industry has been consolidating rapidly, and JAB has had a large impact on this consolidation. The increasing amount of M&A activity in the space has been a direct result of younger consumers’ changing preferences and the desire for constant innovation. JAB looks to become a key player in the market as it looks to control more food and beverage companies in the future.