Quenching a Thirst to Merge : Cadbury Offers $1.71 Billion for Dr Pepper
In a move that would thrust it into the top ranks of the U.S. soft drink industry, Cadbury Schweppes offered $1.71 billion Thursday to acquire the remaining 74% of Dr Pepper/Seven-Up Cos. that it does not already own.
The deal, which was accepted unanimously by Dr Pepper’s board, would propel the London-based confectionery conglomerate to third from a distant fourth in the $49-billion U.S. soft drink market, behind superpowers Coca-Cola Co. and PepsiCo Inc.
The merger, expected to be completed near the end of March, would give Cadbury a 16% share of the U.S. market--the world’s largest--making it a stronger player relative to Coca-Cola and Pepsi, which control about 42% and 31% of the market, respectively. Cadbury currently holds about 5% of the U.S. soft drink market.
Dr Pepper is the nation’s third-largest soft drink maker and the leading producer of non-colas.
Despite Cadbury’s imminent new industry clout, analysts said the merger is not expected to spur much additional competition within the consolidating soft drink market--given that the top three companies will control nearly 90% of the industry.
“Cadbury, though third, would still be a distant third,” said Martin Romm, managing director of New York-based CS First Boston. The company “would be committing strategic suicide if it attempted to directly challenge the industry leaders.”
But the combination of the Dr Pepper and Cadbury brands still “makes good strategic sense,” maximizing growth opportunities for both companies, said Hellen Berry, vice president of marketing research at New York-based Beverage Marketing Corp.
The merger would help spur Dr Pepper’s international growth.
“It lands Cadbury very solidly in the U.S. market and presents Dr Pepper with a wonderful distribution opportunity around the world,” Berry said.
“We are very pleased with the way things are coming together,” said Jim Ball, Dr Pepper’s vice president of corporate communications. The merger “makes us a bigger and better player in the global market.”
Cadbury--which ranks No. 3 in the worldwide soft drink market with such brands as A&W;, Canada Dry, Crush and Sunkist--would acquire global rights to sell Dr Pepper brands, but only U.S. rights to sell Seven-Up brands. International rights are held by Pepsi.
Cadbury, which already owns 25.9% of Dr Pepper’s shares, bid $33 per share in a cash offer for the remaining shares of the Dallas-based company. Dr Pepper stock gained $2 per share to close at $32.50 on Thursday on the New York Stock Exchange. Cadbury added $1.125 to finish at $26.75 on Nasdaq.
Cadbury said it will finance the offer by raising $632 million in cash, partly through an unusual arrangement in which the company will ask shareholders to accept extra stock instead of dividend payments. The rest of the cash would come from a preferred stock offering and borrowings.
Cadbury would assume $828.4 million in Dr Pepper debt and take a $79.5-million charge to reorganize Dr Pepper.
The acquisition proposal marks the most significant move by Cadbury since it merged with Schweppes a quarter of a century ago, and it follows years of eyeing Dr Pepper as a potential boost to its rather weak share in the U.S. market.
“The acquisition of Dr Pepper/Seven-Up represents a major strategic milestone for Cadbury Schweppes. The combination is a powerful and logical one in the largest soft drink market in the world,” Cadbury Chairman Dominic Cadbury said in prepared statement.
The merger would probably lead to job losses in the United States, though Dr Pepper would not say how many. Consumers would not see any changes in the company’s line of products, Ball said.
Dr Pepper, which was formulated by an English pharmacist in Texas in 1885, merged with Seven-Up in 1988.
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Fizzy Logic
Cadbury Schweppes’ long-rumored proposed acquisition of Dr Pepper / Seven-Up would make the British soft drink maker the No. 3 player in the $49-billion U.S. soft drink industry. Here’s a look at the companies and the industry:
CADBURY SCHWEPPES
* Headquarters: London
* Chairman: Dominic Cadbury
* Employees: 39,066
* Major products: Candy, chocolate and soft drinks, sold under familiar names such as Schweppes, Canada Dry, Crush, Sunkist, Cadbury and A&W;
* 1993 revenue: $5.5 billion
* 1993 profit: $350 million
* Earnings per share: $1.81
* Thursday stock price: $26.27, up $1.125 ,on Nasdaq (trades as ADR)
DR PEPPER / SEVEN-UP
* Headquarters: Dallas, Texas
* Chief Executive: John R. Albers
* Employees: 952
* Major products: Dr Pepper, Seven-Up, Diet Seven-Up and Welch’s soft drinks
* 1993 revenue: $707.4 million
* 1993 profit: $77.9 million
* Earnings per share: $1.46
* Thursday stock price: $32.50, up $2 on the NYSE
MARKET SHARE
U.S. soft drink market share for 1993: Coca-Cola: 41.7% PepsiCo: 30.7% Dr Pepper / Seven-Up: 11.2% Cadbury Schweppes: 5.0%* Royal Crown Cola: 2.2% Other: 9.2%
* Market share based on soft drink sales only. Cadbury recently completed its acquisition ofA&W; Brands for $334 million. Cadbury market share includes A&W; market share of 1.8%. If Cadbury’s acquisition of Dr Pepper is successful, its share of the U.S. soft drink market will be approximately 16%.
CADBURY SALES
U.S. soft drink sales, in millions of gallons:
1993: 633
DR PEPPER SALES
U.S. soft drink sales, in millions of gallons:
1993: 1,083 Sources: Bloomberg Business News; Standard & Poor’s Corp; Wire reports
Researched by ADAM S. BAUMAN and JENNIFER OLDHAM / Los Angeles Times
