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Plastic bottles filled with soda prior to be labelled are carried on conveyor belt at the soft-drink maker Cott's bottling plant near Pearson Airport in Toronto in 2009.

Fernando Morales/The Globe and Mail

Private label soft-drink maker Cott Corp. is venturing into water and coffee distribution with a $1.25-billion (U.S.) deal to acquire DSS Group Inc.

The transaction, announced Thursday, includes the assumption of an undisclosed amount of debt as well as the issuance of preferred shares to the selling shareholders.

DSS unit DS Services of America Inc. is a major U.S. direct-to-consumer distributor with 2,100 customer routes that reach about 1.5 million home and office customers.

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"The DSS acquisition substantially accelerates our diversification strategy, bringing a strong home and office water and coffee beverage platform and direct-to-customer delivery network into our portfolio," Cott chief executive officer Jerry Fowden said.

"DSS is a market leader in the growing water and coffee services industries."

Cott shares rose 71 cents (Canadian) -- or 10.27 per cent -- to $7.62 in afternoon trading on the Toronto Stock Exchange.

The new distribution channel will allow Mississauga, Ont.-based Cott to cross sell its products directly to DS Services customers, Mr. Fowden said.

Cost and revenue synergies from the deal should reach about $25-million (U.S.) per year by the end of 2017, the company said.

Cott's diversification strategy comes at a time when demand for soft drinks is slumping, rising competition from price-discounting name brands and a consumer shift to healthier drinks.

The acquisition will reduce Cott's the portion of its private-label business to 49 per cent of total sales from 74 per cent, the company said.

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The deal is expected to close by the end of January, 2015.

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