Keurig's deal to merge with Dr Pepper Snapple (NYSE:DPS) gives shareholders in the soda and beverage company a one-time payout of $103.75 as well as a 13% stake in the new entity. But JAB Holding Company, the private conglomerate, will own a controlling interest in the new Keurig Dr Pepper.
In this segment from Industry Focus: Consumer Goods, the cast discusses their theories for what drove this deal. They break down the potential synergies created by bringing the two companies together, its financial standing, and management team that will lead the new company.
A full transcript follows the video.
This video was recorded on Jan. 30, 2018.
Vincent Shen: JAB actually paid an 80%, approximately, buyout premium for Keurig. I think that will factor into our discussion later on. But let's look at the deal itself, some of the deal specifics. Keurig and DPS will combine to form Keurig Dr Pepper. And that will remain a publicly traded company.
So if you're a DPS shareholder, you'll get a special cash dividend of $103.75 per share. And once the two companies come together, the ownership structure will have DPS investors claiming about 13% ownership of the combined entity. Mondelez, which held a pretty significant chunk of Keurig as well, will control a similar stake, about 13% to 14%. And the remainder will go to JAB and its other partners. Then, Keurig Dr Pepper will have almost $11 billion of annual revenue, and let's just say a pretty eclectic portfolio of different brands and things going on here.
Dan Kline: I think the way to describe it is, these are complementary products. It's not obvious. You don't look at Dr Pepper and say, "Oh, a Dr Pepper K-Cup, that would be perfect." That doesn't work. And before Keurig Kold failed, you might see some obvious move like, "They could do cold drinks." They're clearly not going to do that any time soon. So really, the "synergy" in the deal comes in how they're able to get these products to market. And if you're already going to the store with your K-Cups, you might as well tack on some Dr Pepper, some 7-Up, some Clamato, whatever else it is, and make your supply lines better. Instead of having to have one truck make 10 stops, maybe that one truck makes one stop now, or two stops.
Shen: Yeah. The synergies that the management team has mentioned in their presentation for this deal, they mentioned $600 million of annual synergies that will be recognized around 2021. But there's also $750 million of one-off costs that will stem from this deal, as well. Ultimately, they mentioned things like integrating warehousing and transportation, saving on scale with suppliers, removing duplicate processes and positions. Nothing we haven't heard before in a deal like this in terms of duplicate processes.
Kline: And it's not all that impressive. You look at this, and a lot of times, a company gets to a bigger scale, and there's huge savings. This is just sort of some added efficiency because, like I said, the trucking routes are going to get easier, you won't need two accountants, one sales rep might be able to sell both to a grocery chain. But these are relatively small efficiencies, and on that basis alone, this deal doesn't make all that much sense.
Shen: So look at the numbers, we take that $600 million in annual synergies, they use that in a calculation -- they have pro forma estimates for adjusted net income for the combined entity that's at $1.8 billion, and earnings per share of $1.27. Those bottom line figures, again, include the synergies, which won't be recognized until 2021, so it's not exactly the most accurate pro forma estimate. But it'll also include the potential impact of new tax rates.
With all that in mind, if we take their pro forma $1.27 in earnings per share and apply the trailing price to earnings multiple that Dr Pepper Snapple was trading at prior to the deal announcement, that was around 21x, then Keurig Dr Pepper share will come in at around $27 per share. And the company will also pay $0.60 a year in dividends. That lets them start with about a 2.2% yield. Just to give you a little bit of idea in terms of the numbers behind the deal.
Moving on from some of the strict financials, I'd like to step back and look a little bit at the management team and operations for the new Keurig Dr Pepper as well. The two companies will continue to operate out of their current locations for the time being.
Kline: Which has been sort of a JAB calling card. It does seem like they often replace the CEO ...
Shen: And other leadership, yeah.
Kline: ... though, even when they do that, like with Panera, Ron Shaich stepped upstairs. The CEO of Dr Pepper is joining the board. They're very light-touch about how they do this, and I think that's strategic. They don't want to change, call it, upper middle management, or everything but the top layers, because they don't want to see employees leave. There's obviously going to be some cuts, that's how those synergy savings happen. But JAB has been very smart, and they take a hands-off approach. And in this case, I don't think you're going to see huge groups of leadership, the vice president level people, leaving. They're just going to work for a new company now.
Shen: So leading the combined entity, from Burlington, Mass., will be Keurig CEO Bob Gamgort and Keurig CFO Ozan Dokmecioglu. Larry Young, as you mentioned, who's the president and CEO of Dr Pepper Snapple, will join the board of directors. The deal is expected to close this summer. That about does it for the core details behind players involved, the deal itself, the structure of the deal itself.