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Why has Dr Pepper Snapple Group bought Bai Brands? - Analysis

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Yesterday, Dr Pepper Snapple Group confirmed its US$1.7bn purchase of Bai Brands. Antioxidant drinks firm Bai is one of the company's 'allied brands' and DPSG has been distributing its products since 2013. Last year, the company paid $15m for an unspecified minority stake in Bai.

Bai Brands launched Bai Black earlier this month

Bai Brands launched Bai Black earlier this month

Their relationship came under the spotlight last month, when speculation that Bai was investigating a sale made the headlines. The reports caused DPSG's share price to tumble. The Dr Pepper-owner, it seems, wasn't the market's first thought as the potential suitor for Bai. Or as Cowen & Co's Vivien Azer puts it: "DPSG's shares had been under pressure recently on speculation that Bai could be purchased by a competitor, in particular given DPS's historical aversion to M&A."

It's not surprising, then, that in the client notes that followed yesterday's announcement, analysts thought the deal was a good idea.

Wells Fargo's Bonnie Herzog describes the acquisition as "a high price but, generally, a good deal for DPSG". Cowen & Co's Azer agrees that the price is "somewhat steep" but she believes the purchase helps move DPSG's portfolio further away from the troublesome carbonated soft drinks segment.

Stifel's Mark Swartzberg, meanwhile, is of the opinion that the $1.7bn deal is a "fairly-priced transaction". He says the move "validates" DPSG's allied brands strategy, and "probably improves DPSG's long-term growth potential".

In a conference call following the announcement, management said Bai product sales are expected to double between 2016 and 2018, to approximately $462m.

"Management is confident in this sales outlook on the basis of significant opportunity for distribution gains," notes Swartzberg. "Bai brands in total are under-penetrated in convenience and gas, while newer line extensions have runway in large-format grocery."

The Stifel analyst also says that the company is to step up its marketing of Bai to the tune of $25m, "rendering Bai second only to Dr Pepper in absolute dollar spend".

On top of that, there is also an export opportunity for the US brand, the firm said. Swartzberg says DPSG is already studying expansion into Mexico. "This is likely feasible, profitable, and high growth, in our opinion, considering the recent success of the Penafiel brand in Mexico," he says.

It looks the longer-term case that perhaps $1.7bn won't prove that much, after all.


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