Forstmann, Little & Co. said Wednesday that it has agreed to sell Dr Pepper Co. for $416 million to an investor group that includes executives of the 101-year-old soft-drink company.
Forstmann, Little, a privately held investment firm that acquired Dallas-based Dr Pepper in a leveraged buyout in February, 1984, initially planned to sell the company to Coca-Cola Co. for about $470 million under an agreement reached last February. But the firm scrapped the plan earlier this month after the Federal Trade Commission raised antitrust objections to the proposed merger and won a court injunction blocking the deal.
"While we were, of course, disappointed that the injunction obtained by the FTC did not permit us to complete the sale of Dr Pepper to Coca-Cola, the present transaction is an attractive one," Theodore J. Forstmann, a general partner of Forstmann, Little, said in a prepared statement.
Forstmann, Little said the investor group planning to buy Dr Pepper also includes a unit of the securities firm Shearson Lehman Bros. and Hicks & Haas, a Dallas investment firm that in July, 1985, paid $95 million for a Dr Pepper bottling company based in Dallas.
The purchase is expected to be completed Friday, Forstmann, Little said.
Dr Pepper officials could not be reached for comment. However, in a letter sent to bottlers Wednesday, Dr Pepper Chairman W. W. Clement said he would "not be involved in the day-to-day management activity of the new Dr Pepper Co." He added that the transaction would produce "no (other) anticipated changes that will affect jobs" at the company.
"We have a great team under the leadership of President John Albers and that team will continue to perform to its capability," Clement wrote. "I have the opportunity to remain involved but am happy to turn over the daily responsibilities to established leadership and talented professionals."
Dr Pepper, with about 7.1% of the domestic soft-drink market, ranked third among the nation's top soft-drink producers, according to a survey last year by Beverage Industry, a trade journal.
Coca-Cola led the industry with about 38.6%, Pepsico Inc. was second with 27.4% and Seven-Up Co., a unit of Philip Morris Cos., ranked forth with 6.3%.
The unusually flavored Dr Pepper, which has been likened to cherry-flavored colas, is a largely regional product--with nearly 40% of its sales in just four states: Texas, Arkansas, Oklahoma and Louisiana. But competition is scarce and consumer loyalty is unusually strong, experts say.
"Dr Pepper is not up against any product in the same flavor category," said Emanuel Goldman, a beverage analyst at the Montgomery Securities investment house in San Francisco. "There are many orange drinks and many lemon-limes. But there is only one Pepper drink of any size, and that may be why they (investors) believe Dr Pepper is worth" $416 million.
Although investors are paying $54 million less for Dr Pepper than Coca-Cola offered to pay, Forstmann, Little said it is going to make a hefty profit on the sale.
Forstmann, Little bought Dr Pepper for $650 million and paid off much of the debt that it incurred in the acquisition by selling Dr Pepper's Canada Dry division, nine bottling plants and other assets. The firm's equity investment in Dr Pepper is about $30 million. Thus, the sale would give Forstmann, Little and its investors a total return of nearly 8.5 times their original investment, Forstmann, Little said.