Dr Pepper Halts Plan to Merge With Coca-Cola : Companies Say Prospect of Lengthy FTC Proceedings Caused Deal’s Cancellation
The “cola wars” that sent America’s soft-drink companies into a merger frenzy last winter abated Tuesday as Dr Pepper called off a planned $470-million merger with Coca-Cola Co.
The announcement came just six weeks after Coca-Cola’s rival, Pepsico Inc., canceled its agreement to buy Seven-Up Co. for $380 million. And it came a week after a federal judge blocked quick approval of the Dr Pepper purchase and authorized an antitrust hearing by the Federal Trade Commission.
Forstmann, Little & Co., a New York investment company that acquired Dallas-based Dr Pepper in a leveraged buyout in February, 1984, said in a prepared statement that it and Coca-Cola wanted to continue with the sale but were discouraged by the prospect of lengthy FTC proceedings.
“We have no other choice but to request (that) the agreement be terminated given the prospect of years of litigation with the Federal Trade Commission and the resulting potentially adverse effect on the operations and employees of Dr Pepper,” Theodore J. Forstmann, general partner of Forstmann, Little, said in the statement.
The owners of Dr Pepper, who stood to make 10 times their initial $30-million equity investment, could not be reached for comment about whether Dr Pepper was considering offers from any other suitors.
However, Emanuel Goldman, a beverage analyst at the Montgomery Securities investment house in San Francisco, said he believed that “Forstmann is in no hurry to sell” Dr Pepper.
End to Six-Month Battle
Coca-Cola’s decision ends a nearly six-month tug-of-war with Pepsi to establish soda supremacy in the United States by buying additional market share. Their failures leave the competitive positions of the major manufacturers in the $25-billion soft-drink industry little changed, although Pepsi gained some ground on Coke overseas as a result of its July 14 purchase of the international unit of Seven-Up Co. for $246 million.
“We feel that the acquisition would have been pro-competitive for the soft-drink industry and that eventually we would have been successful in the appeal process,” said Donald R. Keough, president and chief operating officer of Coca-Cola. “However . . . we have agreed to terminate the acquisition agreement without pursuing the matter further through the courts.”
Coca-Cola remains the nation’s No. 1 beverage maker, with about 38.6% of the soft-drink market. Trailing Coke are No. 2 Pepsi-Cola (27.4%), Dr Pepper (7.1%) and Seven-Up (6.3%).
The proposed acquisitions by Coke and Pepsi had been closely watched by antitrust experts as barometers of the Reagan Administration’s attitude toward major mergers within highly concentrated industries.
Many critics, including the FTC, consumer groups and soft-drink competitors such as Royal Crown Cola Co., had feared that the combinations--involving the four biggest companies in the industry--would dry up soft-drink competition, forcing consumers to accept higher prices and fewer product choices.
Royal Crown, which had launched a highly publicized campaign to generate opposition to the Pepsi and Coke mergers, released a statement Tuesday saying it was pleased that the Coke-Dr Pepper deal had unraveled.
“Such a merger would not have been in the best interest of soft-drink consumers and independent bottlers,” James W. Harralson, executive vice president of Royal Crown, said in a prepared statement. “Royal Crown Cola will continue to develop the third bottler network as the most effective means to stimulate healthy competition in our industry and keep soft-drink prices fair.”
However, Montgomery Securities’ analyst Goldman thinks the prospects of Royal Crown establishing an effective third bottler network aren’t bright.
Goldman said that neither Dr Pepper, Seven-Up nor Royal Crown have the financial wherewithal to acquire the other two companies. And many other well-heeled interests don’t seem to be interested.
“I wouldn’t bet the company store on a third bottling network being developed,” Goldman said. “Who wants to take on Coke and Pepsi? It’s not exactly a pleasant way to spend your weekend.”