M&A: Keurig + Dr Pepper = Middle America Ugly Brand Orgy

THE DEAL: AN ABSOLUTE GIFT FOR THOSE STUPID ENOUGH TO OWN DR PEPPER STOCK

Keurig Green Mountain (private held by JAB) is seeking to buy Dr Pepper Snapple (NYSE: DPS) to create a beverage conglomerate ($11b in revenues) of sugary, non-premium, unsophisticated, distinctly American brands, or as their official press release imagines it:

This combination of two iconic beverage companies joins together beloved brands Dr Pepper, 7UP, Snapple, A&W, Mott’s and Sunkist with leading coffee brand Green Mountain Coffee Roasters and the innovative Keurig single-serve coffee system.

They’ll keep the corporate entity public, with JAB owning 87% of the company and current Dr Pepper shareholders owning the remaining 13%. Dr. Pepper shareholders will receive a one-time special dividend of $103.75.

Our Take on Current Valuation

DPS closed on Friday at $95.47. Earnings for the trailing 12 months was $4/share — this isn’t a growth company so it’s fair to assume that number is not moving a whole lot higher. The stock was trading at 24x P/E (trailing) vs the S&P 500 at 23x P/E (trailing). Stock and the market are rich, but for the sake of this analysis let’s assume the 24x P/E multiple was a fair valuation (it’s absolutely not, but we need something to work with for the math).
Keurig is offering $103.75 for 87% of the company, so on Friday that 87% of the company was worth $83.05 – equating to a very healthy premium of 25% to the last closing price.
The stock traded up to $117.07 on Monday. Our view is that the stock should trade no higher than $116 in the current euphoric market environment – A SELL.

But hey, don’t take our word for it, you have to listen to the CEOs of both respective companies to understand what a mess this is, spouting off about how the deal offers investors an innovative ‘total beverage solution’ — wait for it… serving both HOT and COLD beverages. You simply can’t make this shit up.

But wait, it gets better. They provide a made-up $600 million synergy savings target, and the CEO of Keurig states:

Part of the excitement about this deal is that it’s not intuitive at first, but as people learn about it they’re going to realize that this makes total sense.

Umm, ok.

THESE ARE THE BRANDS OF THE FORGOTTEN PEOPLE, TRUMP’S PEOPLE

Let’s deal with some harsh realities and associations of these broken brands:

Keurig Coffee Machine in your office: boss is a dick and you’ve likely been #METOO’d
Dr. Pepper is your go-to drink: Diabetes is a given
Motts for health: Only form of vegetable intake

About Author

Thomas George

Thomas has over 17 years of global institutional investment management experience. At TD Asset Management he was Director of Global Resources and lead Portfolio Manager for over $1 billion of global equities (resource and sustainability funds). Thomas is a CFA charterholder and has been featured on Fox Business, CNBC, Bloomberg, CTV, CBC and the National Post.

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