Dr Pepper Snapple-Keurig Union Should Brew Up Results
We appreciate the strategic rationale of the tie-up, from both a distribution and product mix perspective.
We’re placing our fair value estimate for wide-moat Dr Pepper Snapple (DPS) under review as we further evaluate the impact of the firm’s plan to merge with Keurig Green Mountain (which has been held privately by JAB Holding Company since March 2016), but we surmise the combination is a plus for Dr Pepper shareholders that will likely lead to a more than 10% increase to our valuation (which for the standalone business stands at $92 presently). However, with shares up 25% on the announcement, we don’t think the stock represents an attractive risk/reward opportunity at current levels.
The transaction is expected to close in the second quarter of 2018, after which Dr Pepper shareholders will receive a special dividend of $103.75 and in aggregate will own 13% of the shares of the combined entity. The combined firm, Keurig Dr Pepper, will have annual revenues around $11 billion (versus our $6.7 billion expectation for Dr Pepper in fiscal 2017), which remains materially below those of key competitors Coca-Cola ($42 billion in sales in fiscal 2016) and Pepsi ($63 billion in fiscal 2016). We view the special dividend to be a sufficient, guaranteed return to shareholders (representing an 8% premium to the stock’s last closing price), and appreciate the strategic rationale of the tie up, from both a distribution and product mix (lessened exposure to carbonated soft drinks, which we estimate accounts for 80% of its volume, versus 60%-70% for Coca-Cola and Pepsi’s beverage business) perspective.
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Sonia Vora does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.
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