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Keurig Dr Pepper (KDP) to Acquire CORE Nutrition for $525M

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Keurig Dr Pepper (KDP - Free Report) has agreed to buy CORE Nutrition LLC — a leading bottled water and other drinks’ maker — for $525 million. The company plans to finance this transaction using its common stock, net of current equity investment and some other contractual adjustments. The buyout, which is anticipated to close by the end of 2018, will generate roughly $435 million, net of planned tax benefits. However, it remains subject to customary closing conditions. Following the closure, the transaction is likely to be accretive to KDP’s adjusted earnings per share after 2019, thus having a neutral impact on its 2019 results.

The newly-created Keurig Dr Pepper, formed by the merger of Keurig Green Mountain and Dr Pepper Snapple Group Inc., is not new to CORE Nutrition LLC. This is because CORE has been the former Dr Pepper’s allied brand since 2016. Currently, Keurig Dr Pepper manages two-thirds of CORE’s distribution in the United States. On completion of the acquisition,  KDP will continue to distribute the CORE Hydration and CORE Organic brands through its owned direct store delivery and independent distributor networks. Nevertheless, some existing CORE Nutrition distribution partners may also retain their channel coverage.

We expect the CORE Nutrition acquisition to boost Keurig Dr Pepper’s portfolio beyond its coffee and other beverage brands. In fact, CORE Nutrition, founded in 2015, has been gaining popularity owing to its diversified water and other drinks’ brands, including organic and nutrient-enhanced drinks. Notably, net sales for all CORE beverages improved at average annualized rate of roughly 115% in the past three years. Current retail sales, at measured and unmeasured channels, are expected to be more than $200 million for the latest 52-week period.

Notably, CORE drinks are expected to resonate well with the higher consumers’ demand for innovative and nutritious water offerings, thus significantly contributing to KDP’s performance. Simultaneously, Keurig Dr Pepper’s enhanced business model coupled with solid sales and distribution capabilities should boost the success of the CORE brands’ products.

With growing health and wellness consciousness, consumers are particularly vigilant about the use of artificial sweeteners and related obesity concerns. This, in turn, is hurting the CSD category leading to lower volumes and weak sales. Additionally, potential new taxes on sugar-sweetened beverages and growing regulatory pressures are affecting CSD sales. As a result, soft drinks biggies are now shifting their focus to healthier, sports drinks and sparkling water categories, beyond their high-sugar content soft drinks’ portfolio.

In August this year, Coca-Cola (KO - Free Report) announced plans to buy minority ownership stake in BODYARMOR — one of the major sports performance and hydration brand. Per analysts, Coca-Cola’s investment in BODYARMOR along with its POWERADE sports drink might give a tough fight to PepsiCo‘s (PEP - Free Report) Gatorade. Furthermore, Coca-Cola is looking to expand in the on-the-go coffee business as clear from its deal to buy Costa coffee for $5.1 billion, entered in September.

On the other hand, PepsiCo has inked an agreement to buy a leading carbonated drink machine maker, SodaStream International Ltd. for a total cash outlay of $3.2 billion. The transaction is expected to fortify PepsiCo’s beverage and fast-growing sparkling water portfolio.

Price Performance

Shares of Keurig Dr Pepper, which started trading on NYSE on Jul 10, 2018, decreased 1.4% yesterday. Nevertheless, the stock has gained 4.2% since Jul 10, outperforming the industry’s 1.6% rally. The company currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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