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

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.

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