The demand for “healthy” or “better for you” food and beverages continues as consumers become more health conscious. Following this trend, Dr. Pepper Snapple (DPS) has agreed to acquire Bai brands, the maker of antioxidant and other “all natural” drinks for $1.7 billion. Founded in 2009, Bai has about $300 million in revenue and 373 employees. The acquisition is one of the biggest for DPS and the first major one since it spun off Cadbury Schweppes in 2008.

Demand for Soda Shrinking

Soda companies are faced with shrinking demand for their traditional products and increased competition from new healthy products both from large food manufacturers and startup brands.

Many recognize the need to expand their portfolios in order to continue to grow. Recently Coca-Cola acquired Unilever’s Soy drink business and PepsiCo agreed to acquire KeVita, a probiotic drink maker. Both companies also own a number of “healthy” brands. Coca-Cola owns Dasani water, Honest Tea, PowerAde and Vitamin Water and Pepsi owns Gatorade, Tropicana, Lipton Teas, and Aquafina.

While the multiple for this transaction is on the higher end, DPS is acquiring the potential growth opportunities Bai presents.

Thinking strategically, this acquisition will add breadth to DPS’s product line. DPS hopes to grow the business by filling its existing pipeline and distribution expertise with Bai’s products. By going healthy, DPS may be able to grow despite the declining popularity of soda.

From Strategic Alliance to Acquisition

Sometimes business leaders and owners shy away from acquisition because they are overwhelmed by buying an entire company. It is important to remember that there are many options and tools available to you when it comes to external growth, from strategic alliance to joint ventures to minority interest to a majority stake to 100% acquisition. All of these options should be considered to determine which path is right for your business.

The DPS – Bai transaction did not begin at 100% acquisition. Instead, DPS began with a strategic partnership, then later acquired a minority stake for $15 million in 2014. With minority interest DPS could gain some of the upsides of Bai’s growth, while also mitigating the risks associated with a new relatively and unknown product. Once Bai continued to grow and proved its profitability, DPS decided to acquire the entire business.

Minority investment is often used as a foothold to get your toes wet with an option to acquire the entire company later, depending on what makes the most sense for your business.

Private equity firms are increasingly acquiring minority interests in public companies in order to grow, according to the Wall Street Journal. The landscape for PE is changing. Firms are facing tough competition from strategic acquirers who have cash on their balance sheets and are typically willing to spend more on an acquisition. At the same time, fewer banks are lending to private equity firms because of regulations that restrict the amount of debt allowed in acquisitions, making funding leveraged buyouts difficult.

In this challenging environment, minority interest may prove to be a path to growth. For PE firms, acquiring small stakes in public companies can pave the way to a 100% acquisition.

There are a number of advantages to minority interest for financial and strategic buyers.

1. Save Money

You have the opportunity to pursue external growth with a company that may be too expensive or too big for you to acquire in its entirety. For PE firms that are struggling to find financing, acquiring minority stakes allows them to pursue acquisitions despite limited funding.

2. Spread Risk

If you, like most business leaders, have limited financial resources to invest in acquisition, you can acquire several minority interest to spread your risk, while remaining within your budget.

3. Retain Key Management

It’s unlikely that the entire management team will leave when you acquire a minority stake. These experienced team members may stay on and continue adding value to the company for years to come.

4. Open Doors

Minority interest allows you to pursue opportunities that may not be open to 100% acquisition. It would be much more difficult for a PE firm to outright acquire a publicly traded company than it is slowly acquire minority stakes. For strategic acquirers, there may be not-for-sale owners who are not interested in giving up their entire company, but may be open to selling a piece of it.

5. Execute Your Strategy

Minority investment can be used to eventually acquire a majority stake on even the entire company. It’s common to build in options for the buyer to acquire additional stakes as time passes. For example, Disney acquired a 33% stake in video streaming company BAMTech and has the option to acquire a majority stake in the future.

Photo Credit: Joan Campderrós-i-Canas via Flickr cc