Dallas and Dr Pepper: The Love Affair Continues

At first it appeared to be just another leveraged buyout. Forst-mann Little & Co., the New York-based investment concern that had taken Dallas-based Dr Pepper Co. private in 1984 through a $650 million leveraged buyout, announced August 20 that it was selling the Dallas soft drink manufacturer to another investor group for $416 million. Earlier plans to sell Dr Pepper to the Coca-Cola Co. for $470 million had been abandoned late in July when the merger was opposed by the Federal Trade Commission.

The Dallas icon had survived the first LBO (a purchase heavily financed by debt) and in fact had come out of it a stronger company, with record sales and earnings in 1985. The Forst-mann Little group had sold $455 million in Dr Pepper assets, including ten bottling plants and its Mockingbird Lane headquarters, to reduce the debt. Dr Pepper had cut its overhead by some 50 percent. It was a lean organization.

So when the announcement of the sale came, speculation gravitated to the debt load. Was this just another LBO? If so, what assets were left to be sold, which personnel left to cut? It seemed all that was left to sell was the Dr Pepper formula itself.

“But it’s not just another LBO,” says Dr Pepper president John Albers, who now carries the title of CEO since the sale. “It’s a partnership.”

And so it is, with the major players being Cadbury Schweppes and Shearson Lehman Brothers Inc., each with approximately 30 percent ownership; Hicks & Haas, a Dallas-based private investment partnership, with approximately 14 percent ownership; and senior management of Dr Pepper with approximately 12 percent ownership. The balance of the ownership is with bankers and other investors. Hicks & Haas principals Thomas O. Hicks and Robert B. Haas became co-chairmen of Dr Pepper with the purchase.

The sale meant the old owners at Forstmann Little would realize an 8.5 to 1 return on their initial investment of $30 million in equity. But back in Dallas at Dr Pepper, the sale was much more than a monetary transaction.

Spirits around the Dr Pepper company hadn’t been the best since the plans to sell out to Coke had been announced. Morale reached an all-time low in mid-July following the announcement that Coca-Cola executives planned to fire up to 180 Dr Pepper employees.

“It was a Friday morning,” Albers recalls. “1 had been out of town and when I got in, I called my wife from the airport to let her know I was going straight to the office. But she told me I had better come home. She showed me the headline and I called a meeting at Dr Pepper. It was a terrible day.”

Following the new partnership announcement. Albers called a meeting of employees for August 26. He had good news-this deal did not mean more layoffs; this deal was positive.

The announcement that 200-year-old Cadbury Schweppes with its vast global ties was in the deal opened wide an international door that Dr Pepper had been knocking at since it acquired Canada Dry, with its extensive international distribution, back in 1981. (Ironically, Cadbury Schweppes purchased Canada Dry just weeks before the company entered the Dr Pepper deal from RJR Nabisco. Following the Forstmann Little purchase of Dr Pepper, Canada Dry was the first asset to go on the sale block to service the debt.) Dr Pepper still has a con-tract for all of the Canada Dry production at the Dallas plant, and Albers says that following this sale, Cadbury Schweppes is likely to bring its soft drink production to the Dallas plant as well. That may put Dr Pepper in a situation to hire new workers, but even if it doesn’t, it gives job security to those now employed by Dr Pepper.

Last but not least, Albers talked to employees that day about W.W. “Foots” Clements, Dr Pepper’s supreme super-salesman. Clements, seventy-two, also received a title change with the latest sale, moving from chairman and CEO to chairman emeritus. But don’t misunderstand, he told them: Clements is not out to pasture.

“Mr. Clements is an institution in himself,” Albers says. “His job is much more a working job than that title implies. He’s going to be with us at our bottlers” meetings and will continue to represent the company. I really do not have a number two man at this point and am acting as CEO and chief operating officer. So he [Clements] will be helping in a number of areas from an administrative standpoint and as a sounding board. The change was a natural evolution.”

And so the love affair between Dallas and Dr Pepper continues. Who says you can never come home again?