Quaker-Snapple: $1.4 Billion Is Down the Drain

Closing one of the worst flops in corporate-merger history, Quaker Oats Co. agreed Thursday to sell Snapple Beverage Corp. to Triarc Cos. for $300 million, only 27 months after Quaker spent $1.7 billion to buy the maker of trendy drinks.

The Quaker-Snapple fiasco joins such ill-fated business marriages as AT&T; Corp. and computer maker NCR and General Electric Co. and defunct brokerage house Kidder, Peabody & Co.

But the swiftness with which Quaker’s Snapple investment eroded will make this deal a special case study of mismanagement for a generation of business students.

“This has been a disaster,” said analyst John McMillin of Prudential Securities Inc. in New York. He noted that Quaker’s loss on the purchase means Quaker lost $1.6 million for each day it owned Snapple, which makes exotic juices and iced teas.

Quaker said Snapple just didn’t work out as planned.

“We believed Snapple had tremendous possibilities,” Quaker spokesman Mark Dollins said. “Unfortunately, the synergies did not materialize and [Snapple] did not grow at the rate we anticipated.”

The mess involving Snapple--which virtually invented the market for “alternative” soft drinks and had sales of about $550 million last year--is also an illustration of corporate hubris that ultimately harmed Quaker and its stockholders.

When Quaker bought Snapple in late 1994, many on Wall Street howled that the price was too high, perhaps $1 billion above what Snapple was worth. But Quaker Chairman William D. Smithburg--who had turned sports-drink maker Gatorade into a smashing success after buying that business in 1983--was convinced he could do the same with Snapple, in part by meshing the ways in which Snapple and Gatorade were marketed.

The plan flopped for several reasons. The nation’s thirst for such drinks became more sated and the market’s growth eased just as Quaker bought the company. Huge rivals, such as Coca-Cola Co. and PepsiCo Inc., charged into the market with new products. Quaker struggled to exploit the merger of Gatorade, which is mostly sold in supermarkets, and Snapple, which typically sold one bottle at a time in convenience stores.

*

The problems dragged down the total performance of Chicago-based Quaker, which had sales of $5.2 billion last year, and Quaker’s stock price badly trailed the overall stock market. That has led to widening speculation that Smithburg’s days as Quaker’s chief executive are numbered.

Smithburg, who received no bonus over his $872,506 salary last year, declined to comment. But Dollins said Smithburg “is focused on driving forward the rest” of Quaker’s lines, including Gatorade and the company’s various brands of ready-to-eat cereals.

Triarc is a New York-based company that owns the Arby’s fast-food restaurant chain and several soft drink brands, including Royal Crown and Diet Rite. It’s also been selling its own brand of trendy drinks under the Mistic name.

Triarc is run by Nelson Peltz and Peter May, two financiers who rose to prominence in the 1980s by buying companies with the help of former junk bond king Michael Milken.

Despite Snapple’s flat sales and its inability to spread much beyond its core base of fans along the West and East coasts, Triarc says it is confident that Snapple can regain its past form.

“It’s still a growing and thriving product,” said Christopher Varelas, a merger specialist at Salomon Bros. Inc. who represented Triarc in the deal. “If managed properly, it can be a huge success.”

Quaker’s losses from Snapple actually exceeded the $1.4-billion difference between what it paid for Snapple and its sale price.

As Snapple struggled, Quaker poured millions of dollars into gimmicks aimed at pumping up its sales. The company hired film director Spike Lee for advertising and gave away samples at Little League games and on city street corners. Snapple also posted a $160-million operating loss for 1995 and 1996 combined, which means Quaker’s total losses from Snapple probably approach $2 billion.

*

Quaker bought Snapple from a group led by Thomas H. Lee Co., a Boston investment firm that reaped a remarkable profit of more than $800 million by selling out. Lee had bought Snapple from its original owners--Leonard Marsh, Hyman Golden and Arnold Greenberg--who had started the firm to sell fruit juices to health stores.

Quaker’s stock edged up 25 cents to close at $37.75, while Triarc’s stock jumped $1.625 a share to $17.375, both in New York Stock Exchange composite trading.

Times staff writer Nancy Rivera Brooks contributed to this report.

(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)

Bad Buys

Quaker Oats’ decision to sell its Snapple Beverages unit for an enormous $1.4-billion loss is one of many acquisitions that went bad for buyers. Other acquisitions that went sour include:

* December 1996: AT&T; Corp. spins off its NCR unit, valued at $3.4 billion, considerably less than the $7.48 billion AT&T; paid for the computer company in 1991.

* February 1996: Novell Inc. agrees to sell WordPerfect and several other applications to Canada’s Corel Corp. for $197 million, about a quarter of the $1 billion it paid to buy the closely held firm and the QuattroPro spreadsheet program in 1994.

* October 1994: General Electric Co. sells Kidder, Peabody & Co. to rival brokerage house PaineWebber Group for stock valued at $670 million. GE bought Kidder for $600 million in 1986, but had invested an additional $800 million in the firm between the purchase and the sale.

Sources: Bloomberg News; Times and wire reports