UPDATE 4-Coke to pay Dr Pepper $715 mln to sell drinks

Mon Jun 7, 2010 2:43pm EDT

* Coke to pay $715 mln to distribute Dr Pepper drinks

* Deal follows Coke agreement for top bottler

* Deal puts Dr Pepper, Diet Dr Pepper in new Coke machines

* Dr Pepper shares down 1.5 pct; Coke off 0.3 percent (Adds more comments, background)

By Martinne Geller and Nivedita Bhattacharjee

NEW YORK, June 7 (Reuters) - Coca-Cola Co (KO.N) will pay Dr Pepper Snapple Group Inc (DPS.N) $715 million for the right to continue selling Dr Pepper drinks once it acquires its main North American bottler.

As part of the eagerly awaited deal, announced on Monday, Coke will also include Dr Pepper and Diet Dr Pepper in local fountain accounts currently served by the bottler, Coca-Cola Enterprises Inc (CCE.N), and in its new Freestyle soda fountains, which let consumers choose drinks from more than 100 flavor combinations.

After completing the buyout of the U.S. operations of Coca-Cola Enterprises, Coke will take over CCE's distribution of Dr Pepper in the United States and Canada Dry in the Northeastern part of the country. Coke will also distribute Canada Dry, C'Plus and Schweppes in Canada.

In some areas where Dr Pepper has manufacturing and distribution capabilities, it will take back from Coca-Cola Enterprises responsibility for Squirt, Canada Dry, Schweppes and Cactus Cooler. Dr Pepper expects that to contribute $15 million a year to its annual segment operating profit, a spokesman said.

In addition to the $715 million payment, Dr Pepper beverages will be included in Coke's new Freestyle touch-screen drink machines -- an arrangement Dr Pepper values at $115 million to $135 million.

The agreement follows a similar deal between Dr Pepper and PepsiCo Inc (PEP.N). Pepsi's deal to buy its own top North American bottlers led it to pay Dr Pepper Snapple $900 million to continue selling Dr Pepper, Crush and Schweppes.

Coke said its bottler acquisition remains on track to close in the fourth quarter. Pepsi closed its purchase of Pepsi Bottling Group and PepsiAmericas in February.

Shares of Dr Pepper were down 1.5 percent in afternoon trading at $35.95 as some investors were disappointed with the payout, while Coca-Cola shares were off 0.3 percent at $51.14.

"We believe some investors expected a higher payment to come from Coke," said Credit Suisse analyst Carlos Laboy in a research note. "We have heard from investors who were expecting the number to be north of what PepsiCo paid."

GOOD AND FAIR DEAL

Coke Chief Financial Officer Gary Fayard told reporters that the deal was fair to both companies, and that the Pepsi and Coke deals differed in some important respects, such as Dr Pepper's gamble on Coke's new fountain machines.

"We got a good deal and a fair deal," Fayard said. "I'm most excited ... that (Dr Pepper Snapple) would view our new Freestyle technology as disruptive enough to the industry that they were willing to put $125 million against it just to have access to it."

Coke has 69 of the machines in fast-food chains and restaurants in test markets. By the end of the summer, it expects to have 500 machines, with choices ranging from caffeine-free Diet Coke with Orange to Powerade Zero Raspberry. The company expects to ramp them up significantly across the country early next year, Fayard said.

Deutsche Bank analyst Marc Greenberg said he had expected Coke's payment to range from $900 million to $1 billion, but that the deal reached offered Dr Pepper more long term growth.

"DPS has traded some cash up front for long-term opportunity to expand its flagship brand nationally," Greenberg said in a client note. Yet he said it was hard to put a dollar estimate on the ultimate profit opportunity.

Meanwhile, Morningstar analyst Philip Gorham said he thinks Pepsi is getting a better deal than Coke, even though Coke is paying less than Pepsi.

"CCE does not distribute Dr Pepper products in Mexico, as Pepsi Bottling Group did, and we expect volume to continue to increase in the medium term in this important growth market, giving Pepsi's deal the edge, in our opinion," Gorham said.

Long-standing archrivals Coke and Pepsi are consolidating their North American bottling systems to cut costs and have more control of distribution. [ID:nN25236905]

Coke CEO Muhtar Kent has not ruled out selling or spinning off the bottling business again some time in the future.

With the initial terms of the Dr Pepper licensing deal set at 20 years, with 20-year renewal periods based on Coke meeting performance targets, there is a possibility that ownership of the bottler could change before the deal expires.

"We were all very aware of what the potential U.S. bottling system could evolve into," Fayard said. "We anticipated all of that as we negotiated the transaction." (Editing by Gerald E. McCormick and Matthew Lewis)

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