Personal Finance

Here's Why Dr Pepper Snapple Investors Should Take Keurig's Money

Dr Pepper Snapple Group brands

Dr Pepper Snapple Group (NYSE: DPS) investors have been offered a gift. Keurig Green Mountain, which is owned by JAB Holding Company, is willing to buy out the soda and juice company for $103.75 per share, as well as give shareholders a 13% stake in the new, combined company, for a total value of around $27 billion. Dr Pepper Snapple shareholders shouldn't look that gift horse in the mouth.

Even Keurig CEO Bob Gamgort acknowledges the tie-up between the two beverage makers sounds a little odd, but he told CNBC, "It's not intuitive at first, but as people learn about it they're going to realize that this makes total sense." That's because it's not so much the beverages Keurig is buying as Dr Pepper's distribution network.

Dr Pepper Snapple Group brands

Image source: Dr Pepper Snapple Group.

Bean counters

Over the past few years, Keurig owner JAB Holding has increasingly been cornering the market on coffee, scooping up brands like Jacobs, Senseo, Gevalia, Tassimo, Peets, Caribou, and, of course, Keurig. It also bought Krispy Kreme Doughnuts, Panera Bread, Au Bon Pain, Einstein Bros., Noah's, and Bruegger's Bagels. Basically, it wants to own the breakfast menu for customers on the go.

But being able to deliver all of that to wherever people are shopping requires a sophisticated distribution network. Not that Keurig can't get product onto store shelves, but specializing in the single-serve cup market limits its ability, and bringing Dr Pepper Snapple on board makes it a "total beverage solution," as Dr Pepper CEO Larry Young says.

In addition to the distribution network, this deal suggests Keurig hasn't really given up on its dreams of an at-home cold beverage appliance. The Keurig Kold it introduced years ago with Coca-Cola failed miserably and was discontinued just 10 months after its debut. But with juices and other beverages that would come with Dr Pepper, it may want to try again.

As it has become a coffee powerhouse, Keurig is also butting up against Starbucks , which, in addition to its coffeehouses, also makes ready-to-drink coffee beverages that are sold in grocery stores. Those drinks are distributed by PepsiCo .

The Dr needs some help

Dr Pepper Snapple still hasn't convinced the market that its $1.7 billion acquisition of Bai Brands about a year ago was the right move, though a sound argument can be made there are long-term benefits toward moving away from carbonated beverages.

Still, despite promised benefits of the deal, they've failed to materialize. Rather than hitting the guidance that Bai would account for two percentage points of Dr Pepper's expected 4.5% growth rate for 2017, in the third quarter management hedged and said it would contribute only one percentage point.

Management also earlier said Bai would only dilute earnings by $0.02 per share, but now says it will be a much larger $0.11 per share. Although there are some very good reasons for the misplaced optimism, such as trying to move away from bulk sales to big-box stores, there's a bit of a credibility problem, and Dr Pepper's stock hasn't really budged all year long.

A commercial Keurig coffee station

Image source: Keurig.

Moreover, Dr Pepper is as much joined at the hip with Coke and Pepsi as it is a competitor, having in place 20-year licensing deals with both that saw 57% of its volumes distributed through Coke's and Pepsi's affiliated bottler systems. The two soda giants are Dr Pepper's largest beverage concentrate customers, accounting for 25% and 22%, respectively, of 2016 segment sales. It's possible if the deal goes through, those relationships might unravel.

With a stagnating stock, a declining core business, and an acquisition that was supposed to deliver nearly immediate results, but which has had its benefits pushed further out into the future, the immediate return the Keurig offer would deliver to Dr Pepper Snapple shareholders makes this a deal they might not want to pass up.

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Rich Duprey has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Starbucks. The Motley Fool has a disclosure policy .

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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