Dr Pepper Snapple Group, Inc. DPS has agreed to take over Bai Brands, LLC ("Bai") as well as its entire portfolio of high-growth premium antioxidant-infused beverages in order to expand in the low-calorie beverage market.
Investors cheered the decision, sending Dr Pepper’s share price rallying 2.64% on Nov 22.
The purchase price is $1.7 billion, which includes a tax benefit of $400 million on a net present value basis. The cash deal will be financed through new unsecured notes and a short-term commercial paper.
What Does this Buyout Mean for Dr Pepper?
Bai Brands is one of the fastest growing beverage brands that offers a family of premium better-for-you beverages. The company’s drinks are said to contain 5 calories, antioxidants and no artificial sweeteners. Its product lineup includes flavored water, coconut water and premium ready-to-drink teas. Meanwhile, with its Bai Bubbles, Cocofusion and other innovative brands, Bai Brands is positioned to boost its key beverage segments.
Now, with the shift of consumer preferences toward healthier drinks, Dr Pepper’s inclusion of Bai Brands will boost its profit margin amid declining soda sales.
While, soda sales have deteriorated in recent times for many beverage companies, Bai Brands has witnessed an improvement in sales. The company generated $120 million in sales in 2015 and is on track to reach $300 million this year. On the other hand, Dr Pepper has been seeing consistently sluggish volumes of carbonated beverages, including the diet versions, due to CSD category headwinds.
The challenges in the CSD category have been felt by all major soft drink makers – The Coca-Cola Company KO and PepsiCo Inc. PEP – leading to lower volumes and weak sales.
Dr Pepper had a minority stake in Bai Brands. The company had also added Bai Brands to its allied brands portfolio — products Dr Pepper distributes but does not own — 17 months earlier, thereby broadening its distribution nationwide.
This acquisition is expected to add $132 million to 2017 net sales based on Bai Brands’ estimated total sales of $425 million. Additionally, the deal will likely reduce Dr Pepper’s 2017 earnings by 3 cents owing to the investments in marketing. Nonetheless, the Bai Brands buyout is expected to prove accretive to EPS by 2018.
Post completion of the transaction, which is expected to close in the first quarter of 2017, Bai Brands will operate under Dr Pepper’s packaged beverages segment and continue to be led by founder Ben Weiss.
Meanwhile, in a separate news release, PepsiCo announced that it will acquire KeVita, a maker of probiotic-infused and Kombucha drinks. So it is obvious that these beverage giants are ramping up their alternative beverage offerings amid slowing soda sales.
Zacks Rank & Key Pick
Dr Pepper carries a Zacks Rank #3 (Hold). A better-ranked beverage stock is Coca-Cola Amatil Limited CCLAY.
For Coca-Cola Amatil, full-year 2016 earnings are expected to grow 10.8% and the stock carries a Zanks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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