Dr Pepper Snapple Group Inc. (NYSE:DPS) stock is up roughly 25% on Monday in response to a buyout from privately-owned coffee company Keurig Green Mountain Inc.
DPS stockholders will receive a $103.75 cash dividend and become 13% holders of a new public company called Keurig Dr Pepper (KDP).
Clearly, today is a win for Dr Pepper Snapple Group shareholders. So here’s the question: Does it make sense to stick with the new stock after the buyout?
The Offer’s Upside
The superficial synergies of this deal are clear. Both companies have a strong presence in grocery stores but pale against rivals The Coca-Cola Co (NYSE:KO) and PepsiCo, Inc. (NASDAQ:PEP). As one entity, KDP will hold more sway when it comes to negotiating with grocers.
The two brands can also cross-marketing each other’s products, to an extent. As Keurig CEO Bob Gamgort put it:
“The combination of Dr Pepper Snapple and Keurig will create a new scale beverage company which addresses today’s consumer needs, with a powerful platform of consumer brands and an unparalleled distribution capability to reach virtually every consumer, everywhere.”
The announcement from Keurig Green Mountain’s owner, private equity outfit JAB Holding Company, noted that by 2021, the pairing should create $600 million in synergies and pay 60 cents per share in dividends annually.
JAB Holding Company has turned things around for Keurig Green Mountain since taking the company private in 2016.
Keurig’s sales and earnings were sliding lower for a few years leading up to the JAB deal. Despite Keurig’s dominance of the North American pod-coffee market, consumers had a negative response to the Keurig 2.0.
With this announcement, however, JAB Holding has stated that sales of its coffee pods had accelerated from the low-single digits to the mid-single digits in the latter half of last year. Additionally, the number of U.S. households with Keurigs in them grew over the course of the past two years.
It all sounds quite compelling. I think, however, that this deal may not end up being as exciting or as fruitful as suggested.
Is The Creation Of Keurig Dr Pepper A Smart Move?
Keurig’s saturation of the total addressable market poses a headwind. And the loss of patent protection on some of the machines’ and pods’ critical elements have opened the door to DIY, reusable pods that allow consumers to buy fewer K-Cups. Meanwhile, knockoff single-cup devices are also gaining in popularity.
Even if Keurig machines and K-cups were still all the rage though, Dr Pepper Snapple’s results are less than thrilling. Because of the consumer shift away from all sugary drinks, the company is only expected to report 2017 sales growth of 4.2%, with the pros calling for even less. The EPS for DPS stock are similarly lackluster.
Two mediocre companies don’t necessarily make for one great one, even if each brings something to the table.
But cross-selling opportunities? Maybe, though that’s hardly an iron-clad growth guarantee. The opportunity presupposes that single-cup coffee fans are also drinkers of Dr Pepper, Snapple, or one of its other brands . Maybe they are, but it’s far from a sure thing.
And as far as better pricing power when it comes to getting the product on store shelves, shareholders might be disappointed. While grocers are thrilled to offer Keurig Green Mountain’s K-cups, Dr Pepper, Snapple and all of their brands aren’t as vital to stores as Coke’s and Pepsi’s brands are. Pepsi and Coca-Cola just have much deeper marketing pockets that feed traffic to stores.
Bottom Line for DPS Stock
This buyout is not a bad move, per se, but it’s hardly the game-changer Keurig Green Mountain or DPS stock owners really need.
The company will be created in an environment where both coffee pods and sugar-laden bottled drinks are bumping into a headwind. Throw in the fact that current owner of DPS stock will own so little of Keurig Dr Pepper anyway — not to mention the potential reorganization fee your broker may charge to make the swap.
And Monday’s surge may be the ideal opportunity to take the money in-hand and start looking for something more compelling.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities. You can follow him on Twitter, at @jbrumley.