Is Dr Pepper an acquired taste

If this morning’s news had you doing a spit take over your morning coffee, don’t worry, Keurig Dr Pepper is happy to sell you another cup.

This morning Keurig Green Mountain, a subsidiary of JAB Holding Company, announced a $18.7 billion merger with Dr Pepper Snapple Group (DPS). The deal came with a payout for DPS shareholders of $103.75 per share, along with shares in the newly formed Keurig Dr Pepper (KDP).

“I can say with confidence that the immediate and long-term opportunities that this transaction is going to provide to our shareholders, our owned and allied brands, our partners and our employees is tremendous,” DPS CEO Larry Young said on a conference call this morning. “KDP will be home to some of the most iconic and consumer-loved beverage brands, both hot and cold. And we’ll have an unrivaled and powerful distribution network that spans traditional retail channels, ecommerce, and on-premise outlets.”

As part of the merger, Young will step down as CEO but remain with the company as a member of the board of directors. Keurig CEO Bob Gamgort will helm the new company out of Keurig headquarters in Burlington, Mass.

With 87 percent of the company, JAB Holding Company will control Keurig Dr Pepper, with the remaining 13 percent owned by existing DPS shareholders. The deal includes a one-time cost of $700 million in expenses, but the company projects more than $600 million in synergy savings annually by 2021. JAB Holding partner Mondelez International, which shares ownership of Keurig, will hold a 13 to 14 percent stake.

The news comes as the Luxembourg-based JAB Holding has spent the last few years making major acquisitions in the coffee category. After acquiring Peet’s Coffee in July 2012, JAB Holding since purchased Panera Bread, Caribou Coffee, and Krispy Kreme Doughnuts in a six-year, cross-channel shopping spree. Keurig itself was a part of that wave in March 2016.

Speaking on the call this morning, Gamgort said the merger opens doors to dominate across segments and channels by leveraging the “collective distribution strength” of both companies.

“Together, we will be uniquely positioned to win in a changing beverage landscape by satisfying consumer needs across a wide variety of choices, including hot and cold format, at nearly every point of purchase,” he said.

Gamgort also reminded listeners of his record on mergers and integrations as CEO of Pinnacle Foods, where he successfully acquired brands such as Wishbone, Birds Eye, and Gardein.

Keurig CFO Ozan Dokmecioglu will retain his position in the new company. Other executive roles remain unclear, particularly for key DPS players such as EVP & CFO Martin Ellen.

The acquisition of DPS marks the first major beverage move for JAB outside of the coffee category, and it has left analysts wondering how brands such as Bai, Core, and DPS’ core soda offerings will fit into their overall strategy.

“When you think about the language Gamgort used in the call today, you can start to imagine [Keurig Dr Pepper]/JAB as a company moving from ‘everywhere you want a cup of coffee’ to basically ‘everywhere/every time you want a beverage,’” said Howard Telford, head of soft drinks research at Euromonitor International, in an email. Telford noted that DPS’ allied brands such as Vita Coco, BodyArmor, and High Brew Coffee offer high growth potential.

Although “Allied Brands” who use DPS as part of their route to market would have the opportunity to pull out ahead of the sale, they are unlikely to look elsewhere due to a lack of suitable alternatives, according to entrepreneurs reached by BevNET. The distribution giant covers nearly 70 percent of the U.S., meaning that any attempt to gain leverage from the new entity by the brands due to the change of control would have to be carefully balanced against the potential to lose such a strong partner.

Still, brands are awaiting the shakeout from the deal, wondering if a leaner model will allow them the visibility they have already gained in the DPS portfolio when there was the chance that sales representatives would have even more products to support.

Nevertheless, there were concerns from the investment side that deals could dry up as Keurig digests its huge soda purchase. Dunkin Donuts, rumored to be another potential JAB acquisition target, was down in trading today. On the call announcing the deal, Gamgort said the company was maintaining a strong interest in dealing with allied brands.

Although some questioned whether the synergies between DPS and Keurig made sense, Rabobank beverage analyst Jim Watson told BevNET that access to DPS’ direct store distribution network would greatly benefit all of JAB’s ready-to-drink (RTD) coffee interests, noting that Peet’s Coldcraft distribution system showed the company is seeking new ways to grow its control over RTD coffee sales.

DPS’ access to c-stores could even conceivably lead to a Keurig hot coffee play in the channel, Watson said.

The move is also beneficial from DPS’ perspective. The company’s $1.7 billion acquisition of Bai in 2016 marked a big move for the company into the growing better-for-you beverage sector. Buying into JAB’s coffee market could cover for consumers’ declining interest in the carbonated soft drinks (CSD) that comprise DPS’ core portfolio.

“[The U.S.] RTD coffee category is where I would expect intensified competition happening soon … via Keurig and JAB’s wider foodservice portfolio there are a lot of familiar, household coffee brands with which to move into this space in a bigger way,” Telford told BevNET. “And we’ve already seen how successful PepsiCo/Starbucks have been in the space and the investments [The Coca-Cola Company] have been making to bring foodservice brands into retail RTD coffee.”

On the call, Gamgort emphasized the benefits of creating a large, interconnected brand portfolio which allows the company to succeed in all areas of the market.

“I think one of the things that makes us unique is our openness and willingness to build a business model that’s based on owned, licensed, partnered, and allied brands,” he said. “I think the strength of both of our business models is the fact that we embrace partners and don’t believe that we need to own every brand within our system.”

DPS stock finished high Monday, closing up 22 percent at $117 per share, after a premarket surge to $131.

BevNET Editor Jeffrey Klineman contributed to this story.