by Patricia Commins — Reuters News

CHICAGO — Quaker Oats Co., itself the target of recent takeover speculation, Wednesday made the surprise announcement that it is buying natural fruit drinks maker Snapple Beverage Corp. for $1.7 billion in cash.

The deal will put Quaker Oats' Gatorade sports drink and Snapple's popular tea and fruit juice drinks under the same roof in a move Quaker Oats said will create a leader in the "good-for-you" beverage market.

While Quaker Oats touted the deal as a springboard to boosting its share of the market, disgruntled Snapple shareholders filed a dozen lawsuits seeking to block the deal in a swift denunciation of the sale.

The suits seek damages from Snapple directors for alleged breach of their fiduciary duties in failing to maximize shareholder value by agreeing to Quaker's offer of $14 a share, well below Snapple's high of $32.25 reached earlier this year.

Snapple's stock dropped below the offer price, closing 50 cents lower at $13.75, in Nasdaq trading, while Quaker skidded $7.375 to $67.125 on the New York Stock Exchange.

Wall Street analysts linked the slide in Quaker's stock to the market's conclusion that the deal removes Quaker as a potential takeover target while weakening its profit potential.

"Snapple won't be generating a lot of profit now," said Robert Cummins, managing director of Wertheim Schroder.

The so-called New Age beverage market has about $2 billion in annual sales of non-carbonated fruit and tea drinks, sold mostly in 16-ounce bottles and cans.

Snapple all but created the market and still leads it, although it has been challenged by Coca Cola Co.'s Nestea and Fruitopia brands and PepsiCo Inc.'s Lipton and Ocean Spray drinks.

"Snapple's business has been under pressure and the costs of defending their position have gone up and are going to continue to go up," said CS First Boston analyst Martin Romm. "That may be one reason why they wanted to associate with someone with deep pockets such as Quaker."

Analysts noted Snapple has been fighting for market share against Coke and Pepsi. How Quaker Oats will fare against the two soft drink giants remains an open question, they said.

"This has obviously become much more of a big boys' game. And clearly there are three very big boys playing it," said Hambrecht & Quist analyst Jean-Michel Valette.

Erosion of Snapple's market share by its rivals was all but inevitable, analysts said. Given the strength of Coke and Pepsi, Snapple hasn't done badly "holding its own," said analyst Beth Loewy of UBS.

And Quaker has done "a great job with Gatorade, Romm said. "You have to give them credit. Whether they can pull this off, I don't know," he said.

Quaker officials were enthusiastic about the deal.

"Growth here is extraordinary," Quaker Chairman William Smithburg said in an interview. "We believe these categories have strong long-term, multi-year, into-the-future growth potential not only in the U.S., but internationally."

Company officials countered the view that Quaker Oats bought Snapple to offset competition to Gatorade from Coke's PowerAde and PepsiCo's All Sport sports drinks.

"This is not about defence, this is about offence," Quaker President Phil Marineau told analysts.

Chicago-based Quaker Oats, whose products include its venerable breakfast oatmeal and other cereals, also said it is evaluating the potential sale of its European pet food business and its Mexican chocolate business.

Quaker's annual sales of foods, pet foods and beverages total $6 billion. Its eight flavors of Gatorade sports drink, sold in more than 25 countries, account for $1.2 billion of the total.

East Meadow, N.Y.-based Snapple, which was founded in 1972 as Unadulterated Food Products Inc. and sold all-natural fruit drinks to health food stores, now has annual sales of nearly $700 million.

It said Wednesday its earnings slid in the third quarter, to $7 million, or 6 cents a share, from $27 million, or 22 cents, a year ago. Revenues slipped to $191 million from $203 million.

Its results were well below Wall Street estimates, due mainly to higher promotional and distribution costs forced up by competition, analysts said.

Under terms of the agreement, described as a merger, a Quaker subsidiary will begin a tender offer on Nov. 4 for all Snapple shares at $14 each.

Quaker's stock had climbed as high as $85 on the New York Stock Exchange this year on speculation it would be bought out.

Quaker said the holders of 68 percent of Snapple's stock, including its three founders, Thomas H. Lee Equity Partners LP and the ML-Lee Acquisition Funds, agreed to tender their shares to Quaker.

According to Wall Street sources, Boston-based Lee and its affiliates will book profits of about $1 billion when the deal is completed.

Snapple was taken public through an initial public offering in December 1992. The stock sold at $5 per share in the IPO, adjusted for splits. A secondary offering followed in November 1993.

© 1994 Reuters Limited