In the Spotlight – Reed's Inc, Jones Soda

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The challenging economic environment combined with Jones Soda’s current capitalisation has made it extremely difficult for the firm to continue to operate on a standalone basis. Michelle Russell looks at reaction to the group's merger deal with Reed's.

These were the sentiments of Rick Eiswirth, the chairman of Jones soda, as he announced that the firm has signed a letter of intent to merge with California-based Reed's in a share and cash deal.

Jones Soda shares plunged 40% on the news to $0.50 cents earlier this week, while Reed's, the maker of Ginger Brew, Virgil's Root Beer and China Cola, saw its shares rise 9.5% to $1.73.

As part of the deal, Reed's will issue 4.5m common shares and pay out a collective US$2.6m in cash, equating to around $0.10 per share, to existing Jones shareholders. The deal, if consummated, will value Jones at $0.37 per share, a massive 56% discount on the share price before the deal was announced.

The deal, however, might be "good bet” for Jones, according to the Beverage Digest. The firm has been reviewing strategic alternatives since February 2009, and had only managed to attract one suitor in December.

"Jones is a very small but very good brand... the deal makes very good sense for both companies," said John Sicher, editor of Beverage Digest. "I would expect that Reed's sees value in the Jones brand and would continue to nurture and try to grow it.”

Nonetheless, while the bid by Reed's is more than the $7.9m "indication of interest" Jones received from Big Red Holdings of Texas in December last year, it is still well below Jones' total market value, which was about $15m even after its shares dropped on Tuesday.

CNN Money said that this “rare ‘take-under’ arrangement” highlights how “close to the brink” Seattle-based Jones has come. 

“Profitable for most of its 22-year history, Jones drew a wide fan base to its premium sodas in offbeat flavours like bubblegum and mashed potato. But by 2007, the company was fighting the fallout of a failed expansion effort, compounded by a difficult economy and shrinking soda sales,” the publication said.

Jones may have struggled in recent months, but it is not unlike many other smaller players that have found it extremely tough to hold their own in the cut-throat soft-drinks environment in the US that is dominated by major firms like The Coca Cola Co, Pepsico and Dr Pepper Snapple Group.
Barel Karsen of stock website Benzinga has questioned the deal, which sees shares of Jones Soda continue to trade above the value of the take-under price.

“What is going on here? Has the market gone crazy, or does the market see potential in the share price that the board is missing? Shareholders must approve the take-under transaction before it can go through; but at the current price, you'd have to think buyers would be nuts to pick up these shares unless they can defeat the merger,” Karsen said.

“So are these buyers nuts, or can they defeat the merger? I can't really tell. However, a cursory look at the financial statements of Jones appears to suggest it is selling itself for less than its liquidation value. The filing of lawsuits appears imminent,” he added.

If Jones receives a better offer or more funding, it can pay Reed's up to $75,000 to terminate the “letter of intent”. Shareholders of both companies would have to approve any merger.

SeekingAlpha blogger Jeffrey Moore believes that Jones could “get out” of the deal via unsolicited bids, ie Coca-Cola or PepsiCo.

“Certainly, there will be synergies that the two companies will have. There will most likely be further consolidation and the new company will have better bargaining power in acquiring materials, hiring, and shipping,” he said.

However, he added that, historically, the directors of Jones have made “poor capital allocation decisions”.

He said: “I will no doubt be impressed if Reeds is able to grow shareholder wealth in any meaningful amount in the near future.”

Reed's and Jones have until 5 April to negotiate a definitive agreement.

Reed's Chairman Chris Reed believes the company would be buying a firm that has “innovative marketing programmes, strong brand recognition, and loyal customer following”.

Karsen, however, said: “If you spend enough time watching the markets, you will come across rare, shocking stories every once in a while. But I haven't seen anything as weird as this take-under offer since this occurred in September of 2008.”

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