As previously announced, under the terms of the agreement, Dr Pepper Snapple shareholders received a special cash dividend of $103.75 per share, payable today in U.S. dollars to shareholders of record on July 6. Keurig shareholders now hold 87% and Dr Pepper Snapple shareholders hold 13% of the new company at an implied market cap around $30 billion.
The combined organization is set to generate $11 billion in sales and close to $2 billion in net income. Keurig Dr Pepper hopes to realize $600 million in cost savings on an annualized basis by 2021 and is looking to deliver an annual dividend of $0.60 per share, roughly 3% on today’s market price. At the same time, the company’s total net debt at closing will be $16.6 billion, putting massive pressure on the shares. In 2015, Green Mountain had $1.41 billion in total liabilities. At the end of its latest quarter, Dr Pepper had $7.69 billion in total liabilities. That extra $7.5 billion almost doubles the new entity’s liabilities and punishes shareholders equity.
JAB Holdings, a privately held German conglomerate with its HQ in Luxembourg, led the initial $13.9 billion buyout of Keurig back in 2016, paying $92 per share in cash. JAB is also the owner of Panera Bread, Caribou Coffee, Peet’s Coffee and Krispy Kreme, so merging one of its biggest brands Keurig with Dr Pepper seems dubious.
Since going private, Keurig has further penetrated the US market, increasing its position by 17% in the last two years, while reducing the cost of its pod prices and growing that segment by mid-single digits in 2017. The JAB led Keurig also improved operating income and increased its operating margin in the last two years thanks to its significant productivity improvement programs. However, only time will tell if these measures hold up to scrutiny of the public markets.
At the same time, despite the new added debt, the company’s brands are top shelf. It’s really just Pepsi, Coke, Dr Pepper in the drink aisle and now with Keurig, the company can build on its durable competitive advantage. The merger will create a portfolio of roughly 250 brands that are either owned, licensed or allied with other companies. Coca-Cola is priced at $190 billion in the market, PepsiCo at $157 billion.
If Keurig Dr Pepper earns around $2 billion in 2019, the market cap could rise to a level between $40 billion and $60 billion depending on how investors respond to this deal. That’s a margin of safety that’s worth the risk.
Disclosure: I am not long/short any stock mentioned in this article.
