PLANO, TEXAS — Dr Pepper Snapple Group’s $1.7 billion acquisition of Bai Brands makes a “tremendous amount of sense for us,” said Larry Young, president and chief executive officer, particularly at a time when consumers are increasingly shunning traditional soft drinks in favor of better-for-you beverages.
Princeton, N.J.-based Bai Brands, which makes a range of enhanced waters, has had a distribution relationship with Dr Pepper Snapple Group, Inc. since 2013. On Nov. 22, Dr Pepper Snapple announced an agreement to acquire Bai Brands for a total purchase price of $1.7 billion in cash, which includes a tax benefit for Dr Pepper Snapple of approximately $400 million from the transaction.
|Larry Young, president and c.e.o. of Dr Pepper Snapple
“First and foremost, it solidifies our position in the enhanced water category with the fastest-growing premium brand and also provides us with attractive growth and investment returns,” Mr. Young said during a conference call with investment analysts to discuss the acquisition. “Bai also provides a strong platform for further innovation outside of the Bai 5-calorie product, Bai Bubbles, Bai Cocofusion and other existing extensions of the brand…
“There’s no doubt that Bai has an outstanding portfolio of products with the 5-calorie enhanced water as the base platform launched in 2009. The brand has expanded into the carbonated water category with Bai Bubbles, the coconut water category with Bai Cocofusion, and most recently, into the premium ready-to-drink tea category with Bai Supertea.”
The acquisition is expected to add approximately $132 million in incremental net sales and $43 million in incremental income from operations to Dr Pepper Snapple Group’s current 2017 estimates, said Marty Ellen, chief financial officer.
|Marty Ellen, c.f.o. of Dr Pepper Snapple
“Total 2017 net sales of Bai are expected to be $425 million across all distribution systems, and total income from operations is expected to be approximately $79 million,” Mr. Ellen said. “Our estimates and valuation analysis assume no synergies or other benefits from rapid continuous improvement. We are expecting to increase Bai’s brand marketing spend by about $25 million next year. This will put Bai behind only Dr Pepper in terms of 2017 brand spend.
“The higher brand spend, together with about $50 million of incremental interest expense, is expected to result in 3c of dilution through reported diluted e.p.s. in 2017. However, it is expected to be accretive to reported diluted e.p.s. thereafter.”
The transaction is expected to close in the first quarter of next year, and the Bai business will continue to be led by founder Ben Weiss.
“Ben eats, lives and sleeps this business, so we are very excited to have him on board,” Mr. Young said. “He’s built a fabulous team, and it works really well for us in understanding how we do brands like this going forward.”
In addition to a “strong innovation pipeline,” Mr. Young said he sees significant distribution opportunities available for Bai Brands, particularly with some of the newer introductions, such as Bai Bubbles, a line of sparkling antioxidant infused waters. Dr Pepper Snapple also may expand the brand into Mexico and evaluate other market opportunities over time, he said.
“Bai product offerings today span across beverage categories that are large, with very attractive growth rates and trends,” Mr. Young said. “We believe the addition of Bai adds or extends our presence in these categories, putting us in even better position with our retail customers.”
In recent years, Dr Pepper Snapple has credited partnering with such brands as Bai, Vita Coco, Bodyarmor and Fiji as a key to quickly capturing growth in emerging beverage categories. Earlier in the year, the company inked distribution deals with Core Hydration, a purified water beverage with electrolytes and minerals, and High Brew Coffee, a ready-to-drink cold brew coffee brand. These opportunities allow Dr Pepper Snapple to “pivot with the consumer,” Mr. Ellen said during a recent earnings call.
Whether Dr Pepper Snapple will acquire more of these brands in the future remains to be seen, but Mr. Young said the company plans to continue its allied brands strategy going forward.
“The strategy works very well for us,” he said. “You look at as we distribute them, when these opportunities arise it’s because an owner wants to sell. They want to get some value out of their business, so we have to look at those one on one.
“Our allied brands strategy will continue, and the great news is now Bai is one of our wholly owned priority brands, just like we do with Dr Pepper and the rest of our brands, so you will see no significant change in the way we operate.”
Added Mr. Ellen, “We cannot speak for Ben and his shareholders in terms of why now, though I would say that I think they believe and certainly we believe that together we can grow this brand faster than maybe they could have on their own, and we are excited about that opportunity to do it.“We think it’s a good time for the brand, it’s a good time for us, and we like this transaction a lot.”