A Look at the Ingredient Companies Behind Keurig Dr Pepper

JAB Holding Company, the European investment firm that owns Keurig, Peet's, and a host of other coffee brands, has reached a deal to acquire a controlling interest in Dr. Pepper Snapple (DPS). The deal will see privately-held Keurig Green Mountain merge with the soda company, and the combined entity will trade under the name Keurig Dr. Pepper.

In this segment from Industry Focus: Consumer Goods, Vincent Shen is joined by Motley Fool contributor Daniel B. Kline as they dig into the backgrounds of JAB, Keurig, and Dr. Pepper Snapple, including what each entity brings to the deal.

A full transcript follows the video.

This video was recorded on Jan. 30, 2018.

Vincent Shen: JAB is at it again, but instead of diving directly into the deal specifics like we usually do here, I want to set aside a few minutes to provide some context for the merger. We'll hit Dr Pepper Snapple first. They're a bit more straightforward as a publicly-traded company. I'm going to run through a little bit of background.

Dan Kline: You should also explain that they're merging with Keurig, which is a JAB brand.

Shen: Yes, absolutely. We'll get to all these different players here. It's good to have this context before we dive into some of the whys and hows. The ticker for Dr Pepper Snapple is DPS. I'm going to refer to them as DPS going forward, just to keep it a little smoother.

The company had a market cap of about $17 billion prior to the deal announcement. They generated $6.6 billion of revenue in the trailing 12-month period by selling beverage concentrates and packaged beverages to retailers, bottlers, and distributors. The company has a portfolio that includes over 50 brands. A lot of them are household names that we know: Dr Pepper, obviously, Snapple, Canada Dry, 7-Up, Sunkist, Hawaiian Punch. When we were talking before the show, you seemed to say these are more second-tier brands.

Kline: Yeah, they don't have Coke or Pepsi, but they say they have all the top flavored brands -- they have the top root beer, they have the top fruit punch, they have the top orange soda. They literally say in their press release that they have the top grapefruit soda. If you could have named that before today, I would have been surprised.

Shen: [laughs] Dr Pepper Snapple, DPS, is also a business that has come together as a result of various acquisitions, mergers, and spin-offs over many years. Overall, top line growth for this company over the past several years has been in the low single digits. Not the strongest, given some of the changes that we've seen with consumer preferences and perception of sugary beverages. But the company generates 90% of its revenue in the U.S., with the remainder coming from Canada and Mexico, and it's managed to expand profitability pretty well, grow earnings at a higher rate, and they're starting to invest and turn their focus toward healthier products. They made a deal recently in 2016, they acquired Bai Brands for $1.7 billion. Bai is pretty firmly rooted in the healthy beverage trend.

Kline: And they're expanding Bai pretty aggressively into carbonated waters and healthy waters. They also have sort of an interesting business model where they distribute a number of up-and-coming brands, generally in the non-carbonated, healthier space, which sort of gives them a window into, "This is doing well, maybe we could acquire it down the line."

Shen: And it's definitely interesting, on the concentrate side, for example, if you look through their financial filing, they mention that their biggest customers for that segment are Coca-Cola and Pepsi. So there's a lot of licensing and these different deals happening for Dr Pepper Snapple, and that'll possibly be some of the justification for this deal. We'll look into that for how they might work out the synergies with Keurig.

Let's jump now to the background for Keurig and JAB. Keurig Green Mountain was folded into JAB's empire in 2016 for $14 billion. Dan, tell us a little bit about the JAB story. We've talked about them before on the show, and the many strings of deals they've done, so let's hear it.

Kline: JAB is a family controlled German company that, honestly, we know very little about. What they've been doing for the past few years is, they've been acquiring a lot of companies in the coffee space. Little ones like Douwe Egberts, Tassimo, Senseo, all these little behind the scenes brands. And then they hopped out and bought Panera, they bought Keurig, they own Einstein Bros Bagels. When you look at it, they own maybe 30 something coffee brands, Peet's Coffee, all of these disjointed coffee products, and they haven't done much with them.

By that I mean, they own Krispy Kreme and they own Panera, yet there's no Krispy Kreme donuts at Panera. They own Peet's, they own Caribou Coffee, there's no branded coffee product at Krispy Kreme or Panera. So they have very much, so far, been an acquirer that's putting a portfolio together, and they really haven't given you much sense of what they're going to do with it. Maybe this deal is the first little hint of that.

Shen: Yeah. I'll note, in a period of five years, the company spent tens of billions of dollars and closed deal after deal taking over some of those big names that you mentioned, Panera, they took over Au Bon Pain late last year. That's really just the tip of the iceberg. But at the time of the initial acquisition for Keurig, who's now going to be the merger partner with Dr Pepper Snapple, Keurig was underperforming. They had declining revenue and profitability. The Keurig Kold, competitor to the SodaStream, for example --

Kline: [laughs] Was a disaster.

Shen: -- was an absolute disaster, and the company was having trouble competing with the lower-priced, third-party pod providers.

Kline: It was also facing a backlash over environmental issues. At the time, yes, you had Kold, yes, you had some of these disparate brewers that made cappuccinos that nobody bought. But when you're a one-product company and there's a backlash to that one product, that's not a good thing. The vast majority of their revenue came from K-Cups, and people were saying, "K-Cups pollute. K-Cups are a problem." Going private removed a lot of that scrutiny. Even though they pledged to go 100% recyclable, I think by 2020 --

Shen: Yes, in the U.S.

Kline: -- that took away all that pressure. And they didn't have to report anymore, that was good for them. But you also didn't hear where sales were, and that made people forget that, yes, K-Cups are kind of wasteful.