A 20-year deal announced Monday gives Atlanta-based Coca-Cola Co. continued access to Dr Pepper, a coveted brand that increased its sales last year in a tough market for carbonated soft drinks.
Coca-Cola will spend $715 million in cash to Dr Pepper Snapple Group for the right to distribute Dr Pepper brands in the United States and Canada Dry in the northeast, according to the license agreement. Coca-Cola will also have some distribution rights in Canada, and will expand Dr Pepper and Diet Dr Pepper's distribution in soda fountain accounts.
Dr Pepper Snapple already sells many of its beverages through Coca-Cola Enterprises, the big Atlanta-based bottler.
But Coca-Cola is set to take over Coca-Cola Enterprises' North American operations, and it had to strike a new deal to keep Dr Pepper Snapple's brands in the fold because of a change-of-control provision.
As part of the deal, Coca-Cola promised to sell Dr Pepper and Diet Dr Pepper in its "Freestyle" fountain machines, which allow consumers to mix and match beverages to create their own concoctions, such as vanilla Dr Pepper. Coca-Cola has dozens of the machines in the market now. It wants to have more than 500 in tests later this summer, and eventually thousands in operation. Coca-Cola says its agreement to put Dr Pepper's brands in the machines is worth between $115 million and $135 million.
"I don't want to compare these machines to the iPhone or the iPod," said Gary Fayard, Coca-Cola's chief financial officer. "But within the beverage industry, it almost is that kind of technology."
This is the second windfall for Dr Pepper Snapple this year. Dr Pepper Snapple reaped $900 million from Coca-Cola's main rival, PepsiCo, which bought its two biggest bottlers in February.
Credit Suisse analyst Carlos Laboy said the price tag was in line with his expectations and with the payment by PepsiCo. UBS analyst Kaumil Gajrawala said the $840 million total cost of the deal "looks light" at first glance, but the expansion in soda fountain accounts could lead to more customers trying Dr Pepper brands.
Dr Pepper Snapple said it believes its deal with PepsiCo and Coca-Cola are comparable, based on the beverage volume at stake. Coca-Cola's strength in the fountain business will provide "tremendous exposure" for Dr Pepper and Diet Dr Pepper, according to spokesman Greg Artkop.
"It obviously helps our portfolio to have these brands," said Fayard. He called the agreement "very amicable...fair to both parties."
