FOOL PLATE SPECIAL
Coke Swallows Odwalla

Coca-Cola is still fighting for turf in the juice business, as today's acquisition of Odwalla shows. It's easy to understand why deals like these happen, as growth in the soda segment has slowed while waters, juices, and other departments are comparatively strong. Coca-Cola and its competitors are thus looking to "juice" their numbers. Developing new drink brands is one way to do it, but it sometimes makes more sense to acquire a company with an established brand, reputation, and management team.

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By Dave Marino-Nachison (TMF Braden)
October 30, 2001

Though Coca-Cola's (NYSE: KO) efforts to battle PepsiCo (NYSE: PEP) in the juice market took a blow when the company cancelled its marketing and development partnership with Procter & Gamble (NYSE: PG) last month, it seems to have been given new life today with the announcement that the company agreed to buy Odwalla (Nasdaq: ODWA), a strong and growing player in the premium juices businesses.

Rule Maker and FOOL 50 component Coca-Cola this morning said it will pay approximately $181 million -- or $15.25 per share -- in cash for Odwalla, which markets drinks, smoothies, spring water, and natural food bars under the Odwalla and Samantha brands. The deal is expected to be earnings-neutral in its first year, then boost Coca-Cola's profits down the road. 

Odwalla will be folded into Coca-Cola's Minute Maid division, but will remain stand-alone and its management, the press release announcing the merger said, will stay on. "The innovation and expertise of the Odwalla team," said Minute Maid CEO Don Short, "coupled with our innovation and logistics network are key to expanding the brands they have created and nurtured."

Coca-Cola will pay about half as much for Odwalla as PepsiCo did for then-private South Beach Beverage, which was snapped from under Coca-Cola's nose: A deal to sell South Beach to a Boston firm, with Coca-Cola buying a stake, was on the table before PepsiCo jumped in with a richer offer. PepsiCo also grabbed Quaker from under Coke's nose, paying dearly to add Gatorade and other products to its stable. Early returns from that merger appear positive.

It's easy to understand why deals like these happen -- and why there will likely be more. Growth in the soda segment has slowed, while waters, juices and other departments are comparatively strong. Both Coca-Cola and PepsiCo, as well as Snapple owner Cadbury-Schweppes (NYSE: CSG) and others, are thus looking to "juice" their numbers wherever possible.

Developing new drink brands is one way to do it, but it may sometimes make more sense to acquire a company with an established brand, reputation, and management team. The buyer, theoretically, complements those attributes with its own distribution expertise, bottling arrangements, marketing muscle, and so on. Companies such as Odwalla often have an uphill battle to get ever-finite shelf space, and by partnering with the likes of Coca-Cola their feet are quickly jammed inside thousands of new doors.

But buying a brand that's too young and undeveloped -- a recent visit to a mom-and-pop convenience store in Maryland revealed coolers stocked with drinks awaiting their "big break" -- may defeat the purpose. That's why mergers of this type aren't announced weekly, though there are still some sizable independent players, such as stubborn Arizona, out there.

Dave Marino-Nachison regrets his visit to Parrot Bay. His stock holdings can be viewed online, as can the Motley Fool's disclosure policy.