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Dr Pepper Snapple Solidifies Its Position by Acquiring Bai

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Bai acquisition

On November 22, Dr Pepper Snapple (DPS) announced an agreement to acquire Bai Brands LLC. The company would acquire Bai Brands, maker of premium antioxidant-infused beverages, for $1.7 billion in cash. Based in Hamilton, New Jersey, Bai Brands was founded in 2009 by Ben Weiss. Bai has been a strongly allied brand for Dr Pepper Snapple, which has been distributing it since 2013.

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Benefits of the acquisition

The acquisition of Bai Brands by Dr Pepper Snapple should help the company expand its presence in the healthier beverages category. Dr Pepper Snapple has significant exposure to carbonated soft drinks. The company derives about 80% of its volumes from soda beverages. Larger player Coca-Cola (KO) derived 73% of its worldwide unit case volumes in 2015 from soda or sparkling beverages. Dr Pepper Snapple and Coca-Cola together constitute about 10.0% of the Consumer Staples Select Sector SPDR Fund (XLP).

Soda beverages have experienced weak volumes in recent years as consumers are shifting to healthier beverage options. Dr Pepper Snapple’s acquisition of Bai Brands should help it capture demand for better beverage options.

Bai has a strong presence in the growing beverage categories, like enhanced water, carbonated flavored water, ready-to-drink teas, and coconut water. Bai’s beverages are infused with antioxidants and don’t contain artificial sweeteners.

Financial impact

Dr Pepper Snapple expects to complete this acquisition in the first quarter of 2017. The company intends to finance this acquisition with new unsecured notes and short-term commercial paper. Bai Brands is expected to deliver net sales of ~ $425 million in 2017. Dr Pepper Snapple expects this acquisition to add an additional $132 million to its 2017 sales estimates.

The higher interest expense associated with the financing of the acquisition of Bai Brands and the company’s planned marketing investments in Bai Brands is expected to adversely impact the 2017 bottom line. Currently, Dr Pepper Snapple expects this acquisition to be $0.03 dilutive to its 2017 EPS (earnings per share). Dr Pepper Snapple expects the acquisition to be accretive to its 2018 EPS.

We’ll discuss PepsiCo’s (PEP) acquisition of KeVita in the next part of this series.

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