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Jones Soda shares dropped 40% in morning trading today (9 March) on the news that Reed's is to acquire the fellow US-based soft drinks group in a share and cash merger deal.

The two firms have signed a letter of intent to merge, with California-based Reed's as the surviving partner.

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 37 cents per share, a massive 56% discount on the share price before the deal was announced.

And yet, while Jones shares plunged by $0.35 this morning to reach $0.50 cents at 11.23am ET, Reed's shares rose 9.49% to $1.73 cents.

So where did it all go wrong for Jones Soda?

The struggling soft drinks maker has clearly been hit hard by a drop in consumer spending in the US recession, and chairman Rick Eiswirth’s attempts to remedy this with spending cuts have not been successful enough to fend off potential takeover bids.

Indeed, the firm received an acquisition offer from Big Red Holdings Corporation in December for $0.30 per share, valuing Jones at $7.95m.

"Unfortunately, the challenging economic environment, combined with our current capitalisation, has made it extremely difficult to operate on a standalone basis,” Eiswirth said in a statement today.

Seattle-based Jones, once a hot investor pick famed for its mashed-potato flavoured drinks, has seen its sales sink in the cut-throat soft-drinks environment dominated by the likes of major players such as Coca Cola Co, Pepsico and Dr Pepper Snapple Group.

The company had been reviewing strategic alternatives since February last year but the firm’s problems go back much further than that.

In August 2007 the firm posted a sharp slide in profits for the first six months of the year to $99,039, a huge fall from the $2.3m recorded in the corresponding period a year earlier.

Troubles continued into 2008 when three directors announced they were standing down and the firm cut 38% of its workforce in a bid to reverse sales and profits declines.

And in March 2009 the firm saw its net losses for the year rise to $15.2m from losses of $11.6m in 2007. Sales slowed by 10% to $35.9m for the year.

A month later and founder of Jones Soda, Peter van Stolk, resigned from the soft drinks group's board due to "concerns" about the company's direction.

His departure was a blow for the group, which was clearly struggling in the weakening North American soft drinks market.

Despite this, the soda maker reported an improvement in profits for the first nine months of 2009, with net losses running at $6.1m compared to $11.8m a year earlier.

The bottom-line results showed a meaningful improvement and the firm was encouraged by a number of distribution wins. It had also announced plans for a new packaging and products launch.

But with the news that Ricci is also set to leave the company on 2 April after failing to return the firm to profitability, it's hard to know who the real winners in this deal are.


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