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(Reuters) - Canada's Cott Corp said it would buy a U.S. direct-to-consumer bottled water and coffee distributor to expand beyond private-label soft drinks and juices and widen its client base from retailers and distributors to consumers' offices and homes.
Cott's shares jumped more than 16 percent on Thursday after the company said it would pay $1.25 billion for DSS Group Inc, parent of DS Services of America Inc.
Cott said acquiring the owner of bottled water brands such as Alhambra and Belmont Springs would help it expand margins and reduce its dependency on its private-label products such as Vess soft drinks and Red Rain energy drinks, which now account for about two-thirds of sales.
DS Services, whose website is water.com, operates over 2,100 routes reaching about 1.5 million customers directly in their homes and offices, which Cott said would not only increase its client base, but also help it sell its own array of products.
"This is a new customer channel in which Cott will be able to take advantage of DS Services' extensive route track infrastructure to cross sell elements of Cott's product portfolio direct to DS Services customers," Cott's Chief Executive Jerry Fowden said on a call.
Cott, which has posted falling sales for 11 straight quarters, said DS Services would boost its revenue growth by 2-3 percent per year and add to its adjusted free cash flow per share.
The company expects the deal to reduce its private label business to 49 percent of total sales from 74 percent, with water now accounting for about a third of sales.
Cott posted 2013 sales of $2.1 billion, with Wal-Mart Stores Inc accounting for about 30 percent of that.
After the deal, carbonated soft drink is expected make up about 19 percent of Cott's products portfolio, down from 30 percent. The water delivery business will make up more than a quarter of its products offering.
Cott said the combined company's gross margins for the twelve months ended September was 27 percent, compared with 12 percent on a standalone basis. It expects cost and revenue synergies of about $25 million a year by the end of 2017.
The value of the deal, expected to close by January, includes the assumption of DS Services' debt and the issuance of preferred shares to Crestview Partners and other shareholders.
Credit Suisse is Cott's financial adviser, while Drinker Biddle & Reath LLP is its legal adviser. Barclays is DSS's financial adviser and Paul, Weiss, Rifkind, Wharton & Garrison LLP is its legal advisor.
Cott shares were up 11.3 percent at C$7.69 in afternoon trading on the Toronto Stock Exchange.
Editing by Don Sebastian and Savio D'Souza