Gerry’s Insights: Dr. Pepper Snapple Group & Keurig

Confusing Combination

As I was writing this column, the beverage industry was still just days away from being roiled by the news that Keurig Green Mountain has agreed to acquire Dr Pepper Snapple Group, in a deal that will create an $11 billion (sales) beverage giant.

Of course, any exit for one of the Big Three soft drink giants would be big news, even the runt of the group – which has punched far above its weight, managing to grow its CSDs and marshalling an allied-brand strategy that’s proved highly effective at getting the company efficiently into non-CSD growth sectors. No, the shockwave goes considerably beyond that. It’s not the multiple either: by contemporary standards, the premium seems modest enough that already the class-action mills are beating the bushes for irate shareholders to sue.

Really, what seems to have caused the ruckus is that, even after an elaborate conference call and slide presentation by the two companies, nobody quite gets what this deal does for either party. Outside of the more whimsically operating small-cap realm (think Long Island Iced Tea Corp. pivoting to blockchain), I can’t think of a beverage deal that’s caused more outright befuddlement than this one.

By now, you probably know more about it than I do, so there’s no need to reprise the details at great length. KGM, which picked up the struggling countertop platform after its much-touted Keurig Kold cold-bev system fizzled and partner Coca-Cola washed its hands of the effort, is a privately held company controlled by the Luxembourg-based coffee and restaurant giant JAB Holdings, whose other properties range from Panera Bread and Krispy Kreme to Peet’s and Stumptown, brands which freely appeared in the slide show as available for such opportunities as offering RTD options for DPS to distribute.

By the logic of the two parties to the merger, the deal will create the largest marketer of both hot and cold beverages – compared to Coke and Pepsi, which hardly play in hot beverages at all, and Starbucks, whose cold-beverage business, though substantial, is still a tiny part of the company’s overall mix. Sounds superficially impressive, but – as pretty much every Wall Streeter who follows DPS quickly pointed out – how does that yield any synergy that will help the top line? Representative comments: “Out of left field,” and “unanswered questions about the prospects for Keurig Dr Pepper as a combined entity,” with “unclear” revenue synergies.

But as I digested the news, it occurred to me that this one is just the latest in a series of curious deals in recent months. After all, Nestle left a lot of observers scratching their heads with the outsize purchase price it paid for Blue Bottle, an iconic but fairly modest-size coffee retailer with not much of an RTD presence yet. (Don’t get me wrong: Having just heard Blue Bottle will be opening in my Manhattan neighborhood, I’m not complaining about the expansion the acquisition will fund!) And though it seemed to draw less comment, I found Campbell Soup’s big-ticket acquisition of Snyder’s-Lance just as puzzling: after all, the soup maker’s stated strategy had been to find avenues to growth in the refrigerated perimeter aisles of groceries, building on its Bolthouse Farms and Garden Fresh Gourmet purchases under the Campbell Fresh banner. So where does an old-line maker of shelf-stable snacks fit in, unless Campbell was just punting after encountering some challenges on the C-Fresh side.

So much confusion! But maybe we shouldn’t be so confused. Or should accept a greater degree of confusion. After all, we keep hearing that we’re living in an age of great business disruption, and consumers’ migration away from CSDs to bottled water and once-obscure categories like kombucha and cold-brewed coffee certainly attests to a degree of disruption occurring in beverages. Now, though I’ve read my share of Clayton Christensen, I’m no expert on disruption theory, but it seems that part of the strategy is simply to get in the game so that you’re an active player as things shake out. With the right degree of openness and agility, you should be able to find your way – in contrast, say, to a Xerox, whose sale to Fujifilm in the same week provides a sobering contrast to a company that never could overcome the weight of its legacy businesses.

That seems to be the game Anheuser-Busch InBev is playing, dabbling in small and seemingly arcane brands like Owl’s Brew mixers, GoLive Probiotics, Kombrewcha kombucha and Up Mountain Switchel and just seeing where that takes them. Even its outright acquisition of energy drink and flavored water player Hiball amounted to just pin money for a giant that’s still digesting its SABMiller acquisition and is often rumored to have PepsiCo or Coca-Cola in its sights.

For Keurig Green Mountain – and for JAB Holdings – the deal may simply be a way of obtaining some liquidity and further acquisition currency in the form of public shares as it scopes out the way forward in these disruptive times. As Wells Fargo’s Bonnie Herzog theorized, “the transaction is less a strategic business combination, and either (1) a vehicle to eventually exit its Keurig investment, or more likely (2) a platform company for additional M&A down the road (i.e. being publicly traded gives them optionality to issue equity in future acquisitions).” Indeed, noting the several ties between JAB/KGM and ABI (for example, JAB ceo Olivier Goudet sits on ABI’s board), some even were speculating that at some point the beer giant would enter the picture, perhaps viewing DPS as a decisive way to get back into NAs.

Longtime beverage-watcher Gerry Khermouchis executive editor of Beverage Business Insights, a twice-weekly e-newsletter covering the nonalcoholic beverage sector.