Coca-Cola to Pay $715 Million for Rights to Distribute Dr Pepper Beverages
The cash payment will allow Coca-Cola to sell brands including Dr Pepper and Canada Dry in some regions of the U.S. and Canada for 20 years, the Atlanta-based company said today in a statement. Dr Pepper also takes back the distribution of some brands.
Dr Pepper renegotiated its distribution contracts with Coca-Cola, the world’s largest soda maker, and PepsiCo Inc. after both companies agreed to buy bottlers. PepsiCo paid $900 million this year to distribute some Dr Pepper drinks. The Coca- Cola payment announced today is close to an estimate by Carlos Laboy, an analyst at Credit Suisse in New York.
“The terms and cash amount are in-line with the previous deal with PepsiCo, however we believe some investors expected a higher payment to come from Coke,” Laboy said today in a note. He has a “neutral” recommendation on Dr Pepper stock and doesn’t rate Coca-Cola.
Coca-Cola agreed to buy Coca-Cola Enterprises Inc.’s North American bottling unit in February. The distribution deal will replace those between Dr Pepper and Coca-Cola Enterprises when the acquisition closes later this year, Coca-Cola said.
The payment is lower than the $900 million estimated by Kaumil Gajrawala, an analyst with UBS AG in New York. The difference will be made up largely by Coca-Cola’s agreement to give Dr Pepper access to fountain drink accounts and put Dr Pepper and Diet Dr Pepper on its new Freestyle fountain, Gajrawala said today in a note. He recommends buying Dr Pepper and Coca-Cola shares.
Dr Pepper, in a statement, valued the Freestyle access at $115 million to $135 million.
The Freestyle, a touch screen-controlled drink dispenser that expands offerings to more than 100, will be available in at least 500 U.S. outlets this summer, Coca-Cola said.
Dr Pepper said it will take back distribution of Squirt, Canada Dry, Schweppes and Cactus Cooler sold by Coca-Cola Enterprises in certain U.S. territories.
The agreement imposes new performance conditions on Coca- Cola, Chief Financial Officer Gary Fayard said on a call with reporters, declining to provide further details. Fayard also declined to say whether the new agreement includes a change-in- control clause that would trigger a renegotiation should Coca- Cola spin off the bottling operations.
Coca-Cola bottlers distribute about 42 percent of the Dr Pepper brand’s volume while PepsiCo distributes 39 percent, Fayard said, citing statistics by industry newsletter Beverage Digest.