Less than a month after arch-rival Pepsico agreed to acquire Seven-Up, Coca-Cola--the world's largest soft drink maker--agreed Thursday to buy No. 3 Dr Pepper for $470 million.
The purchase is still subject to antitrust review by the federal government. But, if it and Pepsi's bid for Seven-Up are consummated, about 80% of the nation's $25-billion soft-drink market would be in the hands of the nation's two largest beverage makers.
"The addition of Dr Pepper provides an excellent strategic fit for our carbonated soft drink business," Donald R. Keough, Coca-Cola president and chief operating officer, said in a statement. "Dr Pepper is the premier product in the 'Pepper' category and will enhance our existing product line."
Atlanta-based Coke said the agreement to buy Dr Pepper from its owners, the investment firm of Forstmann Little & Co. and senior Dr Pepper executives, includes payment of $300 million in cash to shareholders and repayment of $170 million in debts owed by Dallas-based Dr Pepper.
At Pepsico headquarters in Purchase, N.Y., spokesman James Griffith said jokingly of the agreement: "The burning question around here is how long will it take Coca-Cola to introduce Dr Pepper Classic." The comment was a poke at Coke's decision last summer to reintroduce its original Coke formula after a consumer backlash developed over the introduction of a Coke with a sweeter taste.
The Dr Pepper agreement was reached only weeks after Pepsico, in an attempt to bolster its 28% share of the soft drink market, agreed on Jan. 25 to buy most of Seven-Up, the nation's No. 4 soft-drink maker, from Philip Morris for $380 million.
At the time, Pepsi said the acquisition of Seven-Up, which dominates the lemon-lime soft drink category, would bring it within striking distance of Coca-Cola by giving Pepsi 34% of the soft drink market, compared to 39% for Coke.
But, if the purchase of Dr Pepper is approved, Coca-Cola's market share will grow to 46%, pushing Pepsi "from hailing distance (of Coke) to yodeling distance," said Jesse Meyers, publisher of the Beverage Digest, an industry newsletter.
If both acquisitions are completed, Chicago-based Royal Crown would be the only remaining independent soft-drink producer of notable size, with between 4.5% and 5% of the market.
Analysts said that the Dr Pepper agreement might have been struck as much for its strategic antitrust implications as for the possible increase in Coke's market share.
"The Coke agreement will force the FTC's hand," said Donald Lupa, a beverage analyst with Duff & Phelps in New York. Lupa said the Federal Trade Commission would be hard-pressed to approve the Pepsi acquisition of Seven-Up and deny Coca-Cola approval to buy Dr Pepper.
Lawrence J. White, a New York University professor and former chief economist for the Justice Department's antitrust division, said he did not think Coke was trying to scuttle the Pepsi deal. But he said he was worried that competition would be reduced if the deals were allowed to proceed: "I think both have a negative effect on competition."
The FTC, which ordinarily examines major corporate acquisitions for anti-competitive effects, did not comment Thursday on the Coke-Dr Pepper deal.
Pepsi executives said privately Thursday that they believe Coca-Cola's plan to buy Dr Pepper will be scrutinized more closely by the FTC than their own agreement.
The executives said Pepsi's purchase of Seven-Up could invigorate that company, which analysts forecast will report losses of $5 million to $10 million for 1985. They said also that Seven-Up's strong presence overseas would enable Pepsi to compete more vigorously in foreign markets where Coca-Cola now has a tremendous lead.
Forstmann Little released data Thursday saying that Dr Pepper's pretax earnings from operations rose to $60.6 million last year from $51 million in 1984 and $38.9 million in 1983.
Since its creation at the Old Corner Drug Store in Waco, Tex., in 1885, Dr Pepper has always been a strong product in the rural areas of the South and Southwest, where, in addition to quenching thirst, the fruity-tasting cola was used as a remedy for everything from acne to arthritis. But Dr Pepper products could not be found in New York until 1970.
Dr Pepper executives are seeking to improve the company's recognition among consumers. On Monday, they will begin a massive marketing campaign west of the Mississippi River--offering Diet Dr Pepper free to consumers who request the beverage by dialing a toll-free number. About 63% of Americans have never tasted Diet Dr Pepper, according to a company survey.