There are two things outside of a bad stock market that can hurt equity investors. One is a badly run company, of which there are many. And then there are just bad stocks. Keurig Dr Pepper Inc. (NASDAQ: KDP) appears to have fallen into the bad stock category on the heels of its $18 billion acquisition of Peet’s Coffee parent JDE – followed by a plan to split into two entities.
KDP’s stock was already running sideways for three years. The NewCo (or NewCos in this case) is one that will focus on Keurig and Peet’s for coffee, with Dr. Pepper being the focus for cold beverages of soda, energy drinks, and tea.
It would be an understatement that the news was not received well. The shares were down 16% for the week late on Friday. But it’s even worse considering the stock is now down over 8% YTD and down about 20% from a year ago. Sure, even considering the biggest one-day drop since the covid plunge of March 2020, this was a stable stock ahead of the $18 billion deal. Now it represents a total unwind of its 2018 merger that took Keurig and jammed it together with Dr. Pepper.
KDP was a $35 just last week, then it slid to $31.10 the next day and then was $28.95 the day after that. This represents a 17% drop when most companies want to unlock long-term growth or added value via a merger. No company wants to merge to then be worth one-sixth less than pre-merger. Or do they?
One problem is that neither company actually represents much great attraction for organic growth. Soda sales have been stagnant for a long time. And it would seem that everyone who wants to drink coffee already does. It remains doubtful that either company can raise prices drastically (even with tariff worries) with the excuse that “it has to pay for our merger costs to make the companies attractive again.”
The new Global Coffee Co. is projected to have annualized combined revenues of roughly $16 billion and $3.1 billion in EBITDA. The remaining Beverage Co. will have annual sales of roughly $11 billion.
Maybe the good news is that this will make for the world’s largest coffee company (almost). Then came word that Wall Street was punishing the merger news. Argus has a pre-merger Buy rating and had just raised its price target to $41 from $40 just days before the merger news hit.
Evercore ISI maintained its Hold rating and $37 target on the heels of the merger, while UBS maintained its Buy rating and $40 price target. But then came the rest of the calls…
HSBC downgraded KDP to Hold from Buy and cut its target to $30 from $42.
Deutsche Bank maintained its Buy rating on KDP but cut its target to $38 from $40. The firm noted that JDE Peet’s acquisition and subsequent planned spin-off is a complex and potentially higher-risk transformation rather than staying together as a beverage only transformation.
BofA Securities maintained its Buy rating, but pointed out that the share price drop reaction indicated that investors wanted a different structure. Adding on $18 billion in new debt is just part of the problem. Two issues stood out here:
- “the balance sheet ramifications of this transaction elicit caution.”
- “significant upside on a combined basis will be difficult unless valuation multiples expand.”
CFRA has a Hold rating and a price target of $32, calling it a justified discount to larger soft drink peers. CFRA noted that JAB is one of the most active private equity players in the space and it and Acorn currently old 69% of JDE Peet’s stock voting power. CFRA believes that JAB is set to emerge as the biggest winner from the new merger — while KDP shareholders are the biggest losers.
KDP shares closed down 0.7% at $29.09 on Friday. Its 52-week range is $28.70 to $38.28, with a market cap that is now just $39.5 billion.
