Quaker Oats Co. said Wednesday that it will acquire Snapple Beverage Corp. for $1.7 billion in cash, creating the nation's third-largest nonalcoholic beverage company and giving it a commanding market share lead in the fast-growing, so-called New Age drinks segment.
Some analysts said the deal would be good for Snapple and Quaker, both of which have been under pressure in recent months. For one, they said, Quaker Oats--which owns the Gatorade sports drink brand--would give Snapple a deep-pocketed parent to fight a growing number of competitors in the $3.5-billion-a-year New Age category. Snapple practically invented the segment.
But investors reacted negatively. In Nasdaq trading Wednesday, Snapple shares fell 50 cents to close at $13.75--below Quaker Oat's $14-a-share bid. At the same time, disgruntled Snapple shareholders filed a dozen lawsuits in Delaware seeking to block the deal. They claim that company directors failed to maximize shareholder value by agreeing to a per-share price well below Snapple's high of $32.25 reached earlier this year.
Meanwhile, Quaker Oats, which has itself been the subject of recent takeover speculation, skidded $7.375 to $67.125 on the New York Stock Exchange. Analysts said the fall reflected the belief that Quaker won't be bought out and that it will be less profitable as a result of merging with Snapple.
"Snapple won't be generating a lot of profit now," said Robert Cummins, managing director of Wertheim Schroder.
Chicago-based Quaker Oats, also a maker of oatmeal and other breakfast cereals, said last week that its profit slid 31% for the fiscal 1995 first quarter ended Sept. 30. In Wednesday's announcement, Quaker Oats also said it might sell its European pet foods and Mexican chocolate holdings.
East Meadow, N.Y.-based Snapple said Wednesday that its third-quarter earnings plunged 74% to $7.1 million, or 6 cents a share, from $26.9 million, or 22 cents a share in the same period last year.
Founded 22 years ago by three friends who started out selling all-natural fruit drinks to health food stores, Snapple became a phenomenon as it expanded into natural sodas and iced teas. Thomas H. Lee Co. bought Snapple from the original owners and took it public in 1992 at $5 per share, adjusted for splits.
The company has reached nearly $700 million in annual sales, but it has seen its market share slide as soft drink giants Coca Cola Co. and PepsiCo Inc. have joined the field of competitors in the New Age drink category, which includes sports drinks, teas, juices and flavored waters.
For example, in the bottled and canned tea category, consumer spending increased 149% in the fiscal year ended in July, according to Information Resources Inc., a Chicago-based marketing research firm. Snapple tea's growth lagged, however, with only an 86.6% sales increase, while sales of Lipton and Nestea (marketed by Coke) more than doubled.
(In the total New Age category, Gatorade has a 21% market share, followed by Snapple, including Snapple Sport, at 14.5%.)
Likewise, Gatorade has had to struggle to retain 80% of the sports drink market against Cocoa-Cola's PowerAde and PepsiCo's All Sport.
"The name of the game in the New Age beverage industry is getting into the stores," said John Frank, editor in chief of Beverage Industry, a trade publication. "Pepsi and Coke have had a stronger connection with supermarkets and have been able to get their products out there."
The merger strengthens Quaker Oats' position in the New Age market, and "Snapple should get the muscle it needs to get more supermarket shelf space," Frank said.
Quaker Oats plans to strengthen Gatorade and Snapple sales in markets where they have been weak, said Quaker spokeswoman Patti Jo Sinopoli.
"We plan on taking Snapple where Gatorade has been and taking Gatorade where Snapple has been," Sinopoli said, noting that Gatorade is popular in the South and Southeast, while Snapple has exhibited strong sales in the Northeast and on the West Coast.
Putting the Snap Back Into Snapple
By acquiring Snapple, Quaker Oats will dominate the New Age beverage market, which includes sports beverages and ready-to-drink teas and coffees. But while the iced tea segment continues to show fast growth, Snapple has lost the market share lead in held in 1993, and its stock has taken a beating due in part to declining profit and increasing competition.
1994 market share of ready-to-drink teas* (preliminary results) Lipton: 24.9% Snapple: 23.2 Nestea: 14.0 AriZona: 12.4 Private label: 4.4 Other: 21.1 * Based on cases sold
Total sales of ready-to-drink teas (in millions of cases) 1994: 177.3
Snapple stock price (monthly closes, except latest) $13.75, down 50 cents
SNAPPLE BEVERAGE CORP. * Headquarters: East Meadow, N.Y. * Chief Executive: Leonard Marsh * Employees: 200 * Major products: A broad selection of iced teas, fruit drinks and other natural beverages. * 1993 revenue: $516.0 million * 1993 net profit: $67.6 million * Earnings per share: $0.56 * Wednesday stock price: $13.75, down 50 cents * Quarterly profit: $7.1 million for quarter ended Sept. 30, down from last year's $26.9 million. Year Founded: 1972; went public in Dec. 1992
QUAKER OATS CO. * Headquarters: Chicago * Chief Executive: William D. Smithburg * Employees: 20,000 * Major products: Brandname packaged foods, pet foods and beverages such as Gatorade Thirst Quencher, SunBolt Energy Drink. * 1994 revenue*: $6.0 billion * 1994 net profit*: $231.5 million * Earnings per share: $3.36 * Fiscal year ended June 30, 1994 * Wednesday stock price: $67.13, down $7.38 * Year Founded: 1877 * Fiscal year ended June 30
Sources: Bloomberg Business News; Standard & Poor's Corp.; Beverage Marketing Corp.
Researched by ADAM S. BAUMAN / Los Angeles Times