Updated from 7:51 a.m. EST with details from conference call and stock price.
Want to be a player in the fast-growing flavored water market? Well, Dr Pepper Snapple Group (DPS) has just made the price of admission much higher.
The maker of Canada Dry and Dr Pepper sodas said Tuesday it will spend $1.7 billion in cash to acquire the entire portfolio of Bai Brands, which makes flavored sparkling and still water filled with antioxidants, an increasingly important niche inside of the broader growing bottled water market.
Dr Pepper shares recently rose 1% to $86.
Bottled water sales rose a solid 6.4% to top $15 billion in 2015 as consumers sought out healthier lifestyles, according to research firm Mintel. The market research firm projects that sales in the bottled water market will surge 34.7% through 2020, including a 75.1% growth rate in the sparkling/mineral/seltzer segment that is home to a Bai Brands.
Bai Brands is on track to post sales of $231 million this year, up from about $120 million in 2015.
Despite the hefty price tag for Bai Brands, the deal is likely a win-win for Dr Pepper Snapple Group for several reasons.
For starters, Bai Brands plays in a growing market with strong future growth prospects due to the broader trend toward healthier eating. Second, Bai Brands is expected to add some $425 million in sales to Dr Pepper Snapple Group in 2017 while only being dilutive by 3 cents a share.
As Dr Pepper Snapple Group leverages its distribution network, marketing budget and management team to bring Bai Brands' latest product innovations to market faster and get them into the hands of new consumers, the brand could quickly become a nice profit center. Executives told analysts on a conference call they plan to increase Bai Brands' marketing budget by $25 million in 2017, placing it behind Dr Pepper in terms of total marketing spend among its portfolio of beverages.
"We're equally impressed with Bai Brands innovation pipeline, which will continue to meet the needs of consumers seeking great tasting, low-calorie beverages with natural flavors and no artificial sweeteners," said Dr Pepper Snapple Group CEO Larry Young. He added Bai Brands is an "extremely good distribution play" and is optimistic Bai Brands newest products such as tea and sparkling beverages would start to show up in more stores after the deal is closed.
Finally, Bai Brands is a known quantity for Dr Pepper Snapple Group as it already distributes the company's drinks under an agreement inked in 2013. So selling a splashy deal for a relative upstart brand to investors shouldn't be too hard. That is especially so considering how Bai Brands has contributed to Dr. Pepper Snapple's Group's sales.
Sales in Dr Pepper Snapple Group's non-carbonated beverage portfolio rose 16% in the third quarter on the back of distribution gains for Bai Brands and Fiji. In 2015, the company's non-carbonated beverage sales gained 13% due to similar dynamics.
Dr Pepper Snapple Group declined to be interviewed for this story.