Coca-Cola to Pay $715 Million for Rights to Distribute Dr Pepper Beverages

Coca-Cola Co. will pay $715 million for the rights to distribute some Dr Pepper Snapple Group Inc. brands, in a new agreement prompted by the acquisition of its largest bottler.

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.

Dr Pepper, based in Plano, Texas, fell 64 cents, or 1.8 percent, to $35.85 at 4:04 p.m. in New York Stock Exchange composite trading. Coca-Cola dropped 47 cents to $50.80.

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.

Freestyle Fountain

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.

To contact the reporters on this story: Duane Stanford in Atlanta at dstanford2@bloomberg.net Lauren Coleman-Lochner in New York at llochner@bloomberg.net;

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