Dr Pepper Snapple, Pepsi buy drinks makers in bid to diversify

(Reuters) - Dr Pepper Snapple Group Inc DPS.N and PepsiCo PEP.N on Tuesday both announced plans to buy alternative drinks makers, the latest examples of beverage companies branching into products perceived as healthier as soda sales decline.

File photo: Dr Pepper bottles are seen inside a store in Port Washington, New York May 7, 2008. REUTERS/Shannon Stapleton

Dr Pepper Snapple, which makes flavoured tea, juice drinks, 7UP and Schweppes sodas, will buy antioxidant beverages maker Bai Brands LLC for $1.7 billion (1.37 billion pounds) in cash, the companies said in a joint statement. Dr Pepper Snapple, which is based in Plano, Texas, already has a roughly 3 percent stake in Bai and a distribution deal with the Hamilton, New Jersey-based company.

Pepsi, based in Purchase, New York, said it will buy probiotic drinks maker KeVita Inc for an undisclosed amount. Reuters reported last month the soda maker was nearing a deal for Oxnard, California-based KeVita, estimated under $500 million.

The moves signify a further push by beverage companies into more premium products amid a challenging business environment. Carbonated beverage demand hit a 30-year low in the United States last year, according to Beverage Digest.

Officials globally are considering sugary drinks taxes to try to stem obesity and diabetes epidemics. This month alone, five U.S. regions approved such levies.

“This is a continued play on health and wellness. The noncarbonated beverage space continues to grow at the expense of the carbonated sodas that Pepsi and Dr Pepper are known for,” said Adam Fleck of Morningstar in Chicago.

Dr Pepper Snapple shares jumped 2.6 percent, and Pepsi shares were up 0.6 percent.

Bai, which means “pure” in Mandarin Chinese, makes carbonated flavoured water, coconut water and premium ready-to-drink teas. KeVita makes kombucha, which is fermented tea, and other drinks that are certified organic, gluten-free and vegan.

Soda giants have built stakes and bought beverage companies to cater to changing tastes. Coca-Cola Co KO.N bought organic bottled-tea maker Honest Tea and Zico Coconut Water and invested in organic juice maker Suja.

The Bai deal is Dr Pepper Snapple’s first major acquisition since it was spun out of Cadbury Schweppes in 2008.

It is a “defensive” move by Dr Pepper Snapple to keep a strategic relationship with Bai, said Morningstar’s Fleck. The company has lost key distribution deals with companies in the past including Vitaminwater, which was sold to Coca-Cola in 2007.

Dr Pepper Snapple, which Reuters reported in October was in talks to buy Bai, said Bai would add $132 million to net sales in 2017. The company said the acquisition is expected to hurt earnings by 3 cents per share in 2017, but will add to profits in 2018. The purchase price includes a tax benefit of about $400 million on a net present value basis.

Reporting by Sruthi Ramakrishnan in Bengaluru; Additional reporting and writing by Chris Prentice in New York; Editing by Leslie Adler