Here’s How Dr. Pepper Snapple Can Benefit From Acquiring Bai Brands

As consumer preferences shift towards “healthier beverages” and cola giants such as PepsiCo and Coca Cola look at diversifying their portfolio of products, Dr Pepper Snapple (NYSE:DPS) is still heavily dependent on carbonated soft drinks for its growth. According to our estimates, the North American carbonated soft drinks segment accounts for nearly 70% of its valuation and the company does not have any significant presence in emerging markets, where most of the growth in this segment is likely to come from.  In this scenario, allied brands are a key driver of growth for the company in the non-carbonated beverages segment. Dr. Pepper Snapple leverages its large scale distribution network and can benefit from the growth of these brands, including Bai. Recent reports suggest that the company is in talks to acquire Bai Brands, as the latter looks for suitors. If Bai is acquired by larger competitors such as Coca Cola or Pepsi Co. (as these companies look to enhance their portfolio), Dr. Pepper Snapple can lose its distribution deal, impacting its revenues and future growth prospects significantly. We believe that, as the company looks at allied brands to tap into the growth in the healthy beverages segment, a strategy to acquire some of these key brands be critical to achieve this growth.

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Allied Brands Driving Growth Of Non-Carbonated Beverages

According to our estimates, the non-carbonated beverages (NCB) segment accounts for nearly 25% of Dr. Pepper Snapple’s valuation.  We expect the company’s market share in this segment to increase rapidly from around 1.5% in 2016 to nearly 2% by the end of our forecast period.

Dr. Pepper’s deals with budding brands are a key driver of growth for this market share and they give the company access to a fast growing market.

Bai means “pure” in Mandarin Chinese and the company sweetens its drinks with plant based ingredients and infuses them with antioxidants from coffee, fruit and white tea.  It is a popular beverage among millennials and health conscious consumers.  Bai contributes significantly to the growth of the NCB segment of Dr. Pepper Snapple and the company attributed its 13% growth in this segment for 2015 to the strong growth of Bai brands and FIJI.

With a portfolio primarily of carbonated beverages, healthy drinks of allied brands are critical for Dr. Pepper Snapple’s future growth.  While the company has not made any major acquisition in the past few years, ensuring that the deal with Bai is not snatched away by competitors is critical for its long term strategy. We believe the acquisition of Bai will ensure that the company maintains its foothold in the fast growing segment of healthy drinks and drive revenues over the long term.

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