Glenboden M & A Originations

Potential for Cott merger with Dr Pepper Snapple

Priority Rating priority rating 4
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Origination Status progress announced in turnaround and refinancing, April 2008
Asset Dr Pepper Snapple Group, no.3 branded soft drinks producer in USA
Buyer Cott Corporation (USA), largest global private label soft drinks producer
Seller shareholders of Cadbury Schweppes plc (UK)
Buyer Rationale transformation from struggling private label producer into major branded player
Seller Rationale ‘end –game’ for de-merger of Cadbury’s US soft drinks business
NBs precedent for this deal structure provided by Kraft’s merger of Post with Ralcorp last year
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Last year, we reviewed the clever cash-free merger of Kraft’s Post cereal business with Ralcorp, adding that it provided a clear solution also for Cadbury Schweppes Americas. Unfortunately Cott’s own financial problems meant they weren’t ready as a partner then, and Cadbury decided to spin off its US beverages as a listed entity instead. However, with Cott’s turnaround well underway, and a new financing package in place, that win-win merger scenario might still happen.

Let’s re-cap on the Post precedent. Kraft couldn’t secure an acceptable bid for this business, no.3 in the RTD cereals market in the US behind two giants. Instead, it struck a deal with the largest private label player in that market, Ralcorp, whereby the two entities were merged, with no cash payment. As a result of this clever scheme, (i) Kraft management got the ‘grossed up’ valuation it wanted, and no longer had to manage that business; (ii) Kraft shareholders gained a major shareholding in the combined entity; (iii) Ralcorp management and shareholders acquired major brands, to transform their business in scale and achieve higher margins.

The history behind Cadbury’s exit from CSA, and the relative market positions of CSA and Cott, are very similar to the above transaction. Cadbury failed to secure an acceptable valuation a year ago (in fact Cott wanted to bid but couldn’t find a financial backer); CSA is no.3 branded player behind two giants; and Cott is the largest private label producer and is seeking higher margin products. The key difference is that Cott is in financial difficulties.

But that might change soon. Cott has a clear -path turnaround plan, focused on cost reductions and higher margin teas and energy drinks. It’s also secured a new credit facility, this month, providing it with assured liquidity into the mid term. The fact that CSA, now Dr Pepper Snapple Group, is about to become a listed company, does not preclude any merger with Cott later on. In fact, even the new name sounds very temporary.

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