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Dr Pepper deal signals advantage of family firms' long term horizons

By Alexandra Newlove

JAB Holdings has cooled its coffee spending spree, striking a deal to buy its first cold drinks company, Dr Pepper Snapple, in a move which has bemused market commentators.

Luxembourg-based JAB, which mainly controls the wealth of Germany's Reimann family, has announced it will buy the US soft drink maker for $18.7 billion, and merge it with coffee pod producer Keurig Green Mountain, which JAB bought in 2015.

JAB has spent more than $30 billion on café assets over the last five years, including Keurig, Caribou Coffee, Krispy Kreme Donuts, and Panera Bread.

Some analysts consider the Dr Pepper deal odd—Barclays' Lauren Lieberman said “many are struggling to understand the strategic rationale”—given coffee is one of the fastest-growing food and drink industries, while large soft drink companies face growing backlash from health lobbyists, and millennials develop a taste for more boutique, less sugar-laden brands.

But does the family business tradition of taking a long-term view free from shareholder interference mean JAB is less hesitant in making such surprising decisions?

Almost certainly, says Chris Simpson, strategy adviser at UK-based Business Doctors.

“Once you have pension funds and institutional investors expecting quarter-on-quarter results, share price growth and/or dividends that have been promised or implied, this kind of option is nigh on impossible to pursue,” Simpson said.

Simpson said the deal already had a complex set of stakeholders, “and this would be made even more challenging if JAB were listed, for instance”.

The combined company—Keurig Dr Pepper (KDP)—will have revenue of about $11 billion per year. Dr Pepper shareholders will receive a special cash dividend of $103.75 per share and will retain 13% of the combined company.

The Reimanns are not involved in any of the operative businesses they own or part own, which include the coffee assets already mentioned plus Bally, Coty, and their original family business, Reckitt Benckiser. They entrust their fortune to three advisers, Peter Harf (pictured right), Bart Becht, and Olivier Goudet, who run JAB and sit on the boards of the subsidiaries.

According to a Financial Times report on the family, the trio of managers make suggestions to the family members on possible investments, “but that the family has the ultimate say”.

“Family businesses are more often than not, in my experience, led in a way that demands consensus...” Simpson said.

“This tends to mean that they are less susceptible to making ego-driven M&A errors which bedevil the publicly-listed sector.”

More than 50,000 M&A deals were announced worldwide in 2017, with 2018 looking set to continue in a similar vein. Previously, only 2007-2008 saw this many annual deals.

Lieberman also emphasised "the long-term perspective of JAB stakeholders", and said the deal was reminiscent of when the holding company merged Coty with P&G's beauty business in 2015.

“In both cases, it would seem JAB is aiming to create a 'challenger' platform and disrupt the status quo in its respective industry,” she said.

“In both cases, we expect the grand plan to become clear over time as JAB is a group with a unique vision on industry evolution and a preference for longer-term thinking.”

Keurig Green Mountain chief executive Bob Gamgort (left) said the deal came about by looking through “the lens of consumer needs, versus traditional manufacturer-defined segments”.

He also emphasised distribution savings, and the combined companies' ability to “reach virtually every consumer, everywhere”.

Gamgort acknowledged on CNBC News that while the deal might seem strange, “that's actually part of the excitement about this”.

“It is not intuitive at first, but as people learn about it they are going to realise that this makes total sense.”

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