Keurig (née GMCR) + Dr Pepper Snapple (DPS) Merger

[johnny]

No opinion on this, but wanted to try and draw some out of any of you.

 

The deal says DPS holders get $103.75 in a special dividend, and retain 13% of the combined company.

 

Pre-announce, DPS was $95.65, and it's now $118.83.

 

So by my math, if we give take Friday's closing price of DPS as IV (seems rich), the current price is made up of $103.75 in dividend and about ~$12.43 of retained DPS, leaving only ~$2.65 for the Keurig component.

 

This only catches my attention because I remember the Keurig take private was at something like $14 Billion, and the current price of DPS implies that the value of Keurig is actually only around $3.7B. And of course, no credit for all of the synergies that could come from Snapple flavored K Cups or whatever.

 

Since I was short GMCR when it was taken private, I feel like this is some kind of vindication. That's the only reason this thread exists. Anybody think Keurig was turned into a good business somehow in the past three years?

[writser]

Thought experiment: I have an empty shell company, borrow ~$18b and offer to buy DPS from you for $103.75 per share and a 13% equity interest in the new combined company. How much is that offer worth?

[johnny]

I'm the wrong person to ask to make the case for it. I've been on the other side of the trade on pretty much every JAB interaction with the public markets. I just wanted to take this opportunity to talk shit about Keurig. (translation: I didn't even read the financing details)

 

The trading has been wild though. The implied value of the equity has doubled and halved since open.

[ugadawg_98]

I posted about this on the "general" board and it probably should have been here, so.....

 

a couple of thoughts:

 

1) Trading has been wild and you're exactly right it's traded in a roughly $20 range all morning. The market clearly can't value the stub.

 

2) In its old incarnation, GMCR was heavily short. I didn't short it, but I knew smart people who did.

 

3) DPS is a good asset. They seem to have a better grip on the move away from colas to non-cola softdrinks. As an aside here, I owned DPS in the low teens after the Cadbury spinoff and sold in the $50s some years later, so, based on today's pricing, maybe my perspective is no better than the GMCR shorts.

 

I actually bought some DPS today at $118s. At that price, with the $103.75 cash component, the stub is under $15, paying a .60 dividend, its a 4% yield.  That's a simplistic, non rigorous way of looking at it, but post closing, I would wager the stub is more likely to open in the $20s than at $15.

[Rasputin]

I put around 1% into DPS around $118.50 too because I think at that price we're paying close to JAB+BDT purchase cost

 

Here is how I think about it:

 

JAB+BDT paid $9 Billion in cash plus Keurig, a business with $1.07 B run rate EBIT to get 1.218 B shares of the combined company.  Let's say Keurig is worth 10X EBIT or $10.7 B, subtract $3.3 B of debt, Keurig's equity is worth $7.4 B.

 

So JAB+BDT paid $9 B in cash plus $7.4 B in Keurig equity to acquire 1.218 B shares of DPS+Keurig or $13.5 per share. 

 

At $118.50, with $103.75 cash pay out, I paid $14.75 per share or about 9% premium to JAB-BDT's cost. 

 

2018 PF EPS (ex restructuring costs) will be around $1.05 growing to $1.27 (only taking into account cost saves) by 2020.  I think it's a reasonable price to pay for this type of business plus the chance to partner with JAB and BDT. 

[ugadawg_98]

My analysis wasn't as sophisticated, but I concur. This closes next quarter, so we'll know soon.

 

Price is truth.

 

 

I put around 1% into DPS around $118.50 too because I think at that price we're paying close to JAB+BDT purchase cost

 

Here is how I think about it:

 

JAB+BDT paid $9 Billion in cash plus Keurig, a business with $1.07 B run rate EBIT to get 1.218 B shares of the combined company.  Let's say Keurig is worth 10X EBIT or $10.7 B, subtract $3.3 B of debt, Keurig's equity is worth $7.4 B.

 

So JAB+BDT paid $9 B in cash plus $7.4 B in Keurig equity to acquire 1.218 B shares of DPS+Keurig or $13.5 per share. 

 

At $118.50, with $103.75 cash pay out, I paid $14.75 per share or about 9% premium to JAB-BDT's cost. 

 

2018 PF EPS (ex restructuring costs) will be around $1.05 growing to $1.27 (only taking into account cost saves) by 2020.  I think it's a reasonable price to pay for this type of business plus the chance to partner with JAB and BDT.

[writser]

I'm the wrong person to ask to make the case for it. I've been on the other side of the trade on pretty much every JAB interaction with the public markets. I just wanted to take this opportunity to talk shit about Keurig. (translation: I didn't even read the financing details)

 

The trading has been wild though. The implied value of the equity has doubled and halved since open.

 

What I am trying to say is that in your initial post you forgot to take into account the fact that the buyer has to finance the transaction. If you value DPS at $95.65 / share but somebody buys it for $103.75 and an equity stake in a new company then the 'retained stake' in DPS net of debt / paid up cash is not worth $12.43, it is worth zero or less. So the $16 stub is actually the markets appraisal of your stake in Keurig + the value of future synergies.

 

If you want to value the stub, do something like Rasputin did.

[johnny]

I understand what you meant, I was just joking. Like I said, I hadn't looked at the financing at all (I did initially snap-assume they were just throwing all external negative rate germany dollars at it)

 

 

[JayGatsby]

Sounds like JAB is going fairly well: http://news.keuriggreenmountain.com/press-release/business/dr-pepper-snapple-and-keurig-green-mountain-merge-creating-challenger

 

Not sure of the tax consequences of the "special cash dividend"... that leaves a high possibility that it is taxable, correct? So if I pay $117, get $103, pay $25 of taxes, my basis is really $142 (before adjusting for the $103)?

[Gregmal]

From what I am hearing, the new Keurig home bar is flying off the shelves. So I did some DD and bought one(for the office of course, biz expense) and yea, the pods are expensive as heck, but its basically a one way ticket to alcoholism. Pretty cool. 

[stockman500]

Oh Wow, looks really cool. I've never heard about it before. 

[gfp]

On 11/17/2021 at 12:18 PM, Gregmal said:

From what I am hearing, the new Keurig home bar is flying off the shelves. So I did some DD and bought one(for the office of course, biz expense) and yea, the pods are expensive as heck, but its basically a one way ticket to alcoholism. Pretty cool. 

 

May be time to ask for a refund soon -

https://www.wsj.com/articles/keurig-for-cocktails-maker-to-shut-down-and-refund-customers-11639787995?mod=hp_lista_pos4

[Gregmal]

3 hours ago, gfp said:

 

May be time to ask for a refund soon -

https://www.wsj.com/articles/keurig-for-cocktails-maker-to-shut-down-and-refund-customers-11639787995?mod=hp_lista_pos4

There may be a value proposition here. Not positive but I believe they will be refunding the machine cost while allowing you to keep it. I’d totally dig that. Then just buy a few dozen sets of pods and be set. 
 

The big question is why? The machines sold like wildfire. Perhaps the pods were duds? They are pretty expensive. I personally thought it insane they sold beer and cider pods at $4-5 each when you could go buy a 6 pack for a few bucks more. Or perhaps some potential liability issues? Quite bizarre.

[Gregmal]

Yea so I was able to confirm if you bought a machine you get a full refund and get to keep it. Pretty sick deal. Only reason I can think of for this development is that perhaps the machine is massively defective and a warranty or repairs will cost more than just giving it to folks. The good news is if you still see one at the store, you can buy it and then get your money back.