Dr Pepper Snapple Group to Acquire Bai for $1.7 Billion

dspgbai970Dr Pepper Snapple Group (DPS) today announced its intention to acquire Bai Brands, LLC, which markets a range of low-calorie, antioxidant-infused beverages, for $1.7 billion. The blockbuster deal was rumored for weeks and comes approximately 19 months after DPS, Bai’s primary distribution partner since 2013, purchased a 3 percent minority stake in the company for $15 million, based on a $500 million valuation.

DPS expects sales of Bai products, which include multiple lines of still and sparkling beverages infused with coffee fruit extract, to double in 2017, with the portfolio generating approximately $425 million in net sales. DPS also anticipates the brand to add an incremental $132 million to its current net sales expectation for next year.

In an investor call held this morning, DPS president and CEO Larry Young said that the company is “excited to see this team continue the breakthrough and disruptive innovation providing consumers with great-tasting and low-calorie beverages” and hailed the acquisition of Bai as one that “makes a tremendous amount of sense for us.”

“First and foremost, it solidifies our position in the enhanced water category with the fastest growing premium brand,” he said. “And it also provides us with attractive growth and investment returns. Bai also provides a strong platform for further innovation.”

The transaction is expected to close in the first quarter of 2017.

Bai will operate within DPS’ Packaged Beverages segment and continue to be led by Ben Weiss, the brand’s founder and CEO, according to a press release.

Weiss praised DPS as “an ally who embraced our mission to change the way the world drinks,” and that he and his team “are thrilled to join the DPS family and create a new path forward with infinite possibilities.”

Still, the deal would appear to contrast with some of Weiss’ recent statements: during an interview with Bloomberg Markets earlier this month, he alluded to ongoing challenges with DPS as a distributor, saying it had outgrown the system and that “there’s barriers there.”

Weiss also said in a separate interview that Bai wasn’t for sale, telling Yahoo News that “the name is Bai, not sell.”

At the time of that interview, however, a J.P. Morgan investment banker had already collected bids for the company, with other potential purchasers including Nestle Waters.

On the surface the deal appears to be somewhat of a capitulation by DPS; Young and CFO Marty Ellen have consistently balked at the prospect of paying huge sums to acquire fast-growing brands, including those in its Allied Brands portfolio, which includes Bai, Vita Coco, BodyArmor, Core and High Brew Coffee.

However, Ellen explained that DPS’ assessment of Bai’s valuation was based on a highly positive outlook for future sales and distribution opportunities, particularly for some of the brand’s newer product lines, including Bubbles, Supertea, Cocofusion and Black.

Moreover, DPS’ analysis “started with a really deep inspection of where the different products in the portfolio are today in terms of distribution, what they’re velocities look like by channel, and in some cases, by major customer and across all channels, we built up our expectation of the future very carefully.”

“We spent a lot of time… thinking carefully about where ACV is and where it could grow and where velocities today and where velocities could grow,” Ellen said. “The [flagship] product has lot of distribution opportunity particularly in [convenience stores] where the ACVs are low. We see this for the first couple years as an extremely good distribution play with increasing velocities so we’re really excited about that.”

Although no synergies were included in the valuation, Ellen said that based on discounted cash flow analysis associated with its current distribution of Bai, DPS “probably paid about $180 million, in that sense, to value the profits we already had.” He called the number “a pretty low price to secure in perpetuity the distribution profits we already have.”

“We think we’ve been very disciplined on this,” Ellen said. “This is actually not a change in our strategy, it’s an evolution. We like the idea of partnering with these brands when they are nascent and getting a chance to see the performance of the brand as their major distributors. This one has clearly proven itself.”

Meanwhile, Young said that there will be “no significant change in the way we operate” with regard to its Allied Brands portfolio strategy, which he said “works very well.” He noted that “when these opportunities arise it’s because an owner wants to sell” and that DPS has to examine each on a “one-on-one” basis.

DPS is expected to support the acquisition with a huge increase in marketing spend for Bai. Bai’s marketing budget will increase by $25 million next year, an amount that will put the brand behind only in Dr Pepper in terms of 2017 brand spend. Ellen stated that next year’s marketing dollars will represent approximately 15-20 percent of total sales for Bai.

The surge in marketing spend is a key piece in DPS’ strategy to “foster an environment where we can capture this doubling of growth,” Ellen said. For DPS, that means potential synergies with Bai in warehousing, distribution, procurement and back office consolidation, are “not on our mind immediately at all.”

“This is about the top line in growth,” Ellen said. “We will capture good profitability from this.”

BevNET Editor-in-Chief Jeff Klineman contributed to this story.