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On of my favorite Charlie Munger quotes is 'When you mix raisins and turds, you still have turds.' This statement pretty much sums up my thoughts on the merger of Jones Soda (OTCQB:JSDA) and Reeds Inc. (REED). Since I have historically been interested in Jones Soda for a long time, this is a merger close to my heart; I generally don't like it when my heart is close to turds (as this merger seems to be).

Reeds, having successfully blown through well over $3 million in cash over the past 4 years (leaving them with literally no cash), even after having borrowed a fair amount, is now trading cash and stock for Jones. I surmise that the cash comes from a preferred share offering recently made (though it isn't enough to cover the ~$2.7 million); but the thing to remember is that JSDA, as of their last 10Q, had over $6 million in cash... Meaning that JSDA shareholders are essentially being paid with their own money and stock currency, which I see less value in than the original Jones shares held.

To juice up the deal for Reeds, they have written into the agreement that in the event that they can't pay out the cash, they can further dilute their common stock at a value of $1.70 per share, which is presently less than it is trading at!

One good thing for Jones is that they can get out of the deal via unsolicited bids; maybe Coke (KO) or Pepsi (PEP) will get in on the action as a way to break into the premium beverage industry.

Certainly, there will be synergies that the 2 companies will have. For example, they will save a good deal just in SG&A; JSDA's head won't be part of the new company. There will most likely be further consolidation and the new company will have better bargaining power in acquiring materials, hiring, and shipping. Ironically, Jones failed miserably at selling their products in big chains such as Kroger (KR) and Wal-Mart (WMT), whereas Reeds is expanding it's relationship with Kroger.

I may be missing something here--in fact, I probably am. But let's face it, the directors of Jones have historically made piss poor capital allocation decisions as they presided over the company becoming virtually worthless--not raising a small country's GDP worth of cash when people couldn't get enough of their stock (at ~$30 bucks a share) probably wasn't the best idea...

Personally, I wouldn't buy Reeds stock pre-merger at virtually any price; it isn't that there isn't upside, it is just that I don't see a margin of safety in the company. I will no doubt be impressed if Reeds is able to grow shareholder wealth in any meaningful amount in the near future.

Disclosure: None. Do your own research before doing anything.

Source: Jones Soda and Reeds Merger Lacks Fizz