January 30, 2018

Breakingviews: JAB takes gulp from 3G with Keurig-Dr Pepper deal

by Breakingviews.

JAB and its partners are taking a gulp from 3G Capital’s fountain. They’re merging Keurig Green Mountain, the coffee-pod outfit it took private in 2016 for $14 billion, with publicly traded Dr Pepper Snapple. It’s reminiscent of how the Warren Buffett-backed architects of Kraft Heinz operate.

The strategic novelty is combining different kinds of hot and cold beverages. Financially, what’s a bit unusual is the private Keurig reversing into a publicly listed company. Dr Pepper was worth $17 billion, a bit under $96 a share, at Friday’s close. Investors bid the shares up as much as 40 percent early on Monday, but the price steadied not far from $120 a share in morning trade, up 25 percent.

Dr Pepper’s owners will collect a $103.75 per share cash dividend, which already gives them a premium. The remaining value is the 13 percent stake they will collectively own in the new Keurig Dr Pepper.

Suppose investors are knocking down the shares 5 percent for the uncertainties of getting a deal done, then the value without that discount is just over $126 a share. Net of the cash that’s coming, that implies a value just shy of $23 a share for Keurig Dr Pepper. That equates to a market capitalization of over $30 billion, by Breakingviews calculations. That’s similar to the figure that comes from applying Dr Pepper’s current price-to-earnings ratio of about 17 to the pro forma $1.8 billion net income figure provided by the companies, which includes forecast cost reductions.

The business will also carry a hefty $17 billion of net debt. But with a business model like 3G’s that’s focused on improving margins even if it means the top line shrinks, JAB – a vehicle owned by the German Reimann family that’s chaired by Bart Becht – is good at reducing leverage quickly. The group has paid down the debt at its coffee company from 5.5 times EBITDA less than two years ago to 2.7 times at the end of 2017. It’s targeting a similar trajectory again.

The Brazilian investors behind 3G have slashed costs at holdings from Anheuser-Busch InBev to Kraft Heinz. The drawback is this can stunt organic growth, making acquisitions the only way to increase revenue. There are echoes of the same approach here – including reversing into a public listing, just as the private Heinz did with Kraft. JAB and Keurig have given Dr Pepper’s investors something to sip on.


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