Coca-Cola Co. announced yesterday a preliminary agreement to acquire Dr Pepper for $470 million, a move that would give it control of nearly half of the $25 billion soft-drink business.
"The addition of Dr Pepper provides an excellent strategic fit for our carbonated soft-drink business," said Donald R. Keough, president and chief operating officer of Coca-Cola. "Dr Pepper is the premier product in the 'pepper' category. . . ."
The $470 million payment to Dr Pepper's owner, Forstmann Little & Co., includes repayment of $170 million in debt on Dr Pepper's books. The decision by Coca-Cola was seen by some analysts as an opportunistic response to the move by its rival, PepsiCo, to buy Seven-Up, announced a few weeks ago, and part of a trend of increasing concentration in the industry.
If federal antitrust authorities approve the combination of Pepsi, the second-largest soft drink company, and Seven-Up, the third-largest, the outlook for Coca-Cola's bid would be improved, said Jesse Meyers, publisher of Beverage Digest, an influential trade publication. Coke is No. 1 in the industry, while Dr Pepper is No. 4, with sales a fraction smaller than Seven-Up's.
If the Coke-Dr Pepper connection is opposed, on the other hand, the chances are that Pepsi's acquisition of Seven-Up will be, too, thus leaving the two top competitors' positions unchanged, said Meyers.
"It's a good poker move," he said.
Some analysts predicted the Federal Trade Commission will approve the acquisition. "It's a good bet, but not a foregone conclusion," John Nelson, an analyst with Brown Bros. Harriman, told Reuters.
But Royal Crown Cola, the fifth-largest soft drink firm, immediately announced its opposition to the Coke and Pepsi acquisitions.
"The proposed mergers are clearly unlawful," said Royal Crown Vice President James Harralson. The company's lawyers are reviewing the two mergers, he said.
At the end of last year, Coca-Cola accounted for 39 percent of soft-drink sales of all kinds, while Pepsi had 25 percent, Seven-Up 7 percent, Dr Pepper 6.9 percent and Royal Crown 4.6 percent, according to Meyers' publication.
According to Meyers, the Coke-Dr Pepper and Pepsi-Seven-Up combinations will clearly make life more difficult for Royal Crown and the smaller manufacturers of root beer and other soft drinks.
Although Royal Crown has been an innovative competitor, leading the market in the introduction of sugar-free and caffein-free drinks, it will have trouble hanging on, said Meyers. "Royal Crown has the smarts, but lacks the dollars," he said.
Size is a tremendous advantage in the soft-drink industry, analysts noted, because of the intense competition for space on grocery shelves and positions at soda fountains. The bottling industry, which distributes the various soft-drink brands, gives its primary energy and investment to promoting the leading companies, said Nelson.
The bottling industry itself is highly concentrated, said Meyers. Two dozen bottlers account for three-quarters of Coke's sales, and the same ratio exists for Pepsi, he said.
But Meyers said the mergers are no threat to consumers. The sharp increase in introduction of new varieties of soft drinks in the 1980s is a response to demand, he said.