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Keurig to take control of Dr Pepper in $18.7 billion deal

Cases of Dr. Pepper soda in a warehouse at the Dr. Pepper Snapple Group bottling plant in Irving, Texas, on Oct. 25, 2016. MUST CREDIT: Bloomberg photo by Luke Sharrett.

JAB Holding Co.'s audacious effort to build a food-and-beverage empire, which already includes Krispy Kreme Doughnuts and Caribou Coffee, has taken a surprise turn into soft drinks.

The investment firm's Keurig Green Mountain Inc. business, known for its single-serve coffee brewers, agreed on Monday to take control of Dr Pepper Snapple Group Inc. The deal will pay $18.7 billion in cash to shareholders and assemble a massive beverage distribution network in the U.S., giving JAB's businesses even greater control over how Americans eat and drink.

Dr Pepper Snapple shareholders will get $103.75 a share in a special cash dividend and retain 13 percent of the combined business, the companies said. The dividend is about 9 percent above where shares of Plano, Texas-based Dr Pepper Snapple closed on Friday. Existing investors in Keurig Green Mountain, a closely held company run by JAB, will own 87 percent of the new entity.

Dr Pepper climbed as much as 32 percent to $126.65 after the transaction was announced, marking the biggest intraday rally since the shares were listed in 2008. The stock had slipped 1.5 percent this year through the end of last week.

The deal vaults JAB into competition with the likes of Coca-Cola Co. and PepsiCo Inc., bringing a stable of brands that includes 7Up lemon-lime soda, A&W root beer and Mott's apple juice. Keurig Dr Pepper, as the new company will be known, will have pro forma 2017 revenue of about $11 billion.

JAB, which is backed by the billionaire Reimann family, has been placing increasingly bold bets on food and drink businesses. At the same time, it's shifted away from fashion holdings such as Jimmy Choo.

A big selling point of the deal is building a distribution network across the beverage industry. Keurig has relationships with e-commerce companies and tech sellers, including Amazon.com Inc. and Best Buy Co., an area where Dr Pepper isn't as strong. Dr Pepper Snapple, meanwhile, has ties to convenience stores, drugstores and beverage vendors.

"Combined, our nationwide distribution system will be unrivaled," Keurig Chief Executive Officer Bob Gamgort said on a call with analysts.

The deal will be structured as a reverse merger. Dr Pepper Snapple will be renamed Keurig Dr Pepper at closing, and it will issue shares to Keurig Green Mountain's stockholders to buy the company. As a result, Keurig Green Mountain's investors will own 87 percent of Keurig Dr Pepper.

Goldman Sachs served as lead financial adviser to Keurig. BDT & Co., AFW LP, J.P. Morgan Securities and Bank of America Merrill Lynch also advised the coffee company, while Skadden, Arps, Slate, Meagher & Flom served as legal counsel. Credit Suisse Group was financial adviser to Dr Pepper Snapple, and Morgan, Lewis & Bockius provided legal advice.

JAB, run by consumer-goods industry veterans Peter Harf, Bart Becht and Olivier Goudet, has transformed the fast-food and drink industries with a series of acquisitions that grew from a 2013 deal for the owner of Douwe Egberts coffee. That business was combined with Mondelez International Inc.'s Jacobs coffee in 2015.

Other acquisitions included Panera Bread Co., the Einstein Noah Restaurant Group, Peet's Coffee & Tea, Stumptown Coffee Roasters and Au Bon Pain. Mondelez -- the maker of Oreo cookies and Triscuit crackers -- is an investor in Keurig as a result of the 2015 deal and will hold about 13 percent to 14 percent of Keurig Dr Pepper.

Meanwhile, JAB has moved to divest its luxury holdings. It sold stiletto shoe maker Jimmy Choo to Michael Kors Holdings and jacket brand Belstaff to chemical company Ineos. Shandong Ruyi Group of China is the leading bidder for Bally International, the Swiss leather-goods brand owned by JAB, according to people familiar with the situation.

Dr Pepper Snapple itself is the product of serial dealmaking, principally by Cadbury Schweppes, which bought the Dr. Pepper and 7Up assets in 1995 and added Snapple in 2000. Cadbury, the U.K. chocolate maker that's now owned by Mondelez, spun off the beverage assets and listed them in New York in 2008.

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