Comment - Coca-Cola takes wind from Dr Pepper Snapple sails
Dr Pepper to be served in Coke's Freestyle fountains
Dr Pepper Snapple Group's share price has dipped upon news that it will receive slightly less money than expected from The Coca-Cola Co for the licences to bottle and distribute its key drinks brands in North America.
Dr Pepper Snapple's (DPSG) share price slipped by 1% in early trading today (7 June).
The fall followed its announcement that Coca-Cola will pay it US$715m to gain the distribution and bottling rights to key DPSG drinks brands in several US states. Coca-Cola must buy the rights from Coca-Cola Enterprises, as part of its takeover of the bottler's North America business.
Analysts had been expecting DPSG to reap a windfall of at least $800m from the deal, which likely explains the fall in shares today. DPSG gained $900m earlier this year for a similar deal with PepsiCo after it, too, acquired its major bottlers.
That said, DPSG could have fared worse. Analyst group Stifel Nicolaus predicted last month that Dr Pepper Snapple might get as little as $500m from the deal, because Coca-Cola relies less than PepsiCo on bottled drinks and has a heavier presence in fountain drinks.
This fear has proved unfounded and, over the medium and longer term, DPS prospects remain pretty strong in a North American soft drinks market that is tough.
Despite pessimism on the Coca-Cola payment, Stifel Nicolaus said last month: "We believe underlying demand for DPS products remains much stronger than that for soft drinks generally."
Stifel and other analyst groups also highlighted DPS' marketing spend, which rose in 2009 and again in the first quarter of 2010.
In March, UBS upgraded DPSG to buy from neutral, saying that it does not believe the market is fully valuing strong fundamentals for the business.
Coca-Cola is bound to bottle and offer DPSG drinks for 20 years and has pledged to give Dr Pepper and Diet Dr Pepper access to its new Freestyle fountain dispenser.
There remain some concerns in the analyst fraternity about DPSG's lack of presence in non-carbonated drinks, but the overall picture looks promising for company.
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