Update: Triarc to Net Hefty Profit from Sale of Snapple to Cadbury Schweppes

Updated from 1:20 p.m. EDT

Cadbury Schweppes(CSG) of Britain will add the Snapple Beverage Group to its drinks portfolio for almost $1 billion in cash, the company said Monday.

Cadbury Schweppes will pay Triarc Companies (TRY), based in New York, $910 million in cash and will assume about $420 million in debt for the acquisition of Snapple, which includes Snapple ice teas and fruit drinks, Mistic, Stewart's Root Beer and Royal Crown Cola.

The deal also includes a $120 million payment for employee options, giving the acquisition a total value of $1.45 billion.

The deal marks a dramatic turnaround for Snapple, and gives Triarc a tidy profit on the sale. Triarc bought Snapple from Quaker Oats in 1997 for about $300 million, just three years after the cereal giant bought the drinks company for $1.7 billion, a deal that some analysts described as the "worst acquisition in memory," according to the New York Times.

But Triarc orchestrated a remarkable change in fortunes at the beverage maker. In the second half of 1997, just after Snapple changed hands, beverage sales volume was flat vs. a 25% decline in the first half of that year. The next year saw volume gains of 8% followed by a 10% increase in 1999.

"So you've really had a significant turnaround since day one when Snapple was owned by Triarc," said Skip Carpenter, an analyst at Donaldson Lufkin & Jenrette. Triarc, he said, "put some excitement back into the product."

Snapple's so-called "new age" beverages -- noncarbonated, premium fruit drinks -- are part of the growth side of the beverage market, Carpenter said. "It will allow [Cadbury] to establish themselves as a leading player on that side of the business."

Carpenter has a 'buy' rating on Cadbury Schweppes. His firm has not been an underwriter for Schweppes, but has had an underwriting relationship with Triarc.

While Carpenter praised the Snapple brand, he is concerned that distribution problems could cause Cadbury Schweppes headaches in the coming months. "I think that's the thing I'm going to be focusing on," he said.

Snapple does a significant amount of its own distribution, while Cadbury Schweppes mainly relies on independent bottling agreements to get its beverages to market. The company will now have to coordinate its bottling operations between three cities -- Dallas, where Dr.Pepper and 7-UP are bottled, Stamford, Conn., where its Motts plant is located, and Snapple's operations in White Plains, N.Y.

Bill Pecoriello, an analyst at Sanford Berstein who covers Cadbury Schweppes, was cautious in a report issued Monday. While Snapple seems a solid strategic fit for Schweppes, the market for noncarbonated beverages will become more competitive as drinks leaders Pepsi (PEP) and Coca Cola (KO) are expected to make significant investments in the arena. In addition, the cost of doing business in convenience store coolers -- a significant portion of Snapple's volume -- could skyrocket, he said.

"We expect Coke and Pepsi to kick up the pressure in the convenience store channel against Snapple," he wrote. "In addition, brands like Snapple have taken increased space from Coke and Pepsi in convenience store owned coolers and Coke and Pepsi are likely to attempt to take that space back."

He also warned that Cadbury Schweppes could stifle innovation at Snapple. "In the noncarbonated segment, today's hottest brand is tomorrow's 'has-been,'" he wrote. "Cadbury hasn't been known as a great innovator in the past which means that it is critical that they retain the entrepreneurial culture of Snapple."

Pecoriello has a market underperform rating on Cadbury Schweppes and his firm has no underwriting relationship with the company.

The transaction is expected to close in the fourth quarter of 2000. Triarc will withdraw its previously announced filing for an initial public offering of Snapple.

Following the sale, Triarc will still own the Arby's restaurant franchise, as well as the franchises for T.J. Cinnamons and Pasta Connections.

Triarc finished up 75 cents or 3%, at $25. Cadbury Schweppes' American depositary receipts finished down 13 cents at $22.38.