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)?