On January 29, 2018, Dr. Pepper Snapple Group and Keurig Green Mountain Inc. entered into a definitive merger agreement to create Keurig Dr. Pepper (KDP) for $123 a share. The Fund’s cost is $15.23. We bought Dr. Pepper shortly after it was spun out of Cadbury Schweppes for less than ten times earnings. We discovered a highly focused and competent management team. The two companies will bring iconic brands such as 7 Up, A&W, Mott’s and Sunkist together with Green Mountain Coffee Roasters, Keurig’s single serve coffee system, and more than 75 owned, licensed, and partner brands. Dr. Pepper Snapple shareholders will receive $103.75 per share, or $18.7B, in a special cash dividend and retain 13% of the combined company. KDP is targeting $600M in synergies on an annualized basis by 2021 and a dividend of $0.60 per share at the close of the transition. Total net debt is expected to be approximately $16.6B with a target net debt/EBIDTA ratio below 3.0x within two to three years after closing. KDP will have combined proforma 2017 annual revenues of approximately $11B. This is another example of private equity firms buying our high free cash flow generating businesses–which has been a common occurrence in our portfolio over the years. Private equity firms have close to one trillion dollars in buying power and could be a material source for mergers, especially as prices correct and become more enticing.
From Jeff Auxier (Trades, Portfolio)'s first-quarter 2018 shareholder letter.
