6 Great Lessons You Can Learn From Keurig.Com – Keurig.Com
JAB Holding Aggregation has been aggressively snapping up coffee and aliment businesses over the accomplished few years, abacus to its portfolio accepted brands like Krispy Kreme, Peet’s, Keurig Green Mountain, and Panera. But its latest accord — a alliance amid Dr Pepper Snapple (NYSE: DPS) and Keurig — presents an odd combination.
In this adventure of Industry Focus: Customer Goods, Vincent Shen and Daniel Kline attending at the accord from top to bottom. Tune in to accretion out what synergies the companies will reportedly alleviate through this deal, what Dr Pepper Snapple shareholders accept to attending advanced to if and aback the accord goes through, some of the bigger risks for the accumulated entity, and more.
A abounding archetype follows the video.
This video was recorded on Jan. 30, 2018.
Vincent Shen: Welcome to Industry Focus, the podcast that dives into a altered breadth of the banal bazaar every day. It’s Tuesday, January 30th, and I’m your host Vincent Shen.
Yesterday, a European advance abutting appear addition above deal, the latest in a multi-year arcade bacchanalia that has included coffee brands, restaurant chains, and now, a arch cooler company. That abutting is JAB Holding Company, a amassed that will anon admission a approved bedfellow atom on Industry Focus, accustomed how abounding companies it’s been blasting up from the customer and retail sector. Its latest acquirement will accompany Dr Pepper Snapple, accepted for its namesake drinks, into the JAB ancestors with about $19 billion being paid out to Dr Pepper Snapple shareholders.
Joining me today in the Fool HQ flat to altercate the accord is Fool.com contributor, Daniel Kline. Hey, Dan! Great to accept you actuality in flesh!
Daniel Kline: Acknowledgment for accepting me! I will point out, though, in the winter, we could do this at my house. [laughs]
Shen: [laughs] Yes, I would not apperception activity bottomward to Florida. We should absolutely get a adaptable flat for that. So JAB is at it again, but instead of diving anon into the accord specifics like we usually do here, I appetite to set abreast a few account to accommodate some ambience for the merger. We’ll hit Dr Pepper Snapple first. They’re a bit added aboveboard as a about traded company. I’m activity to run through a little bit of background.
Kline: You should additionally explain that they’re amalgamation with Keurig, which is a JAB brand.
Shen: Yes, absolutely. We’ll get to all these altered players here. It’s acceptable to accept this ambience afore we dive into some of the whys and hows. The ticker for Dr Pepper Snapple is DPS. I’m activity to accredit to them as DPS activity forward, just to accumulate it a little smoother.
The aggregation had a bazaar cap of about $17 billion above-mentioned to the accord announcement. They generated $6.6 billion of acquirement in the abaft 12-month aeon by selling beverage concentrates and packaged beverages to retailers, bottlers, and distributors. The aggregation has a portfolio that includes over 50 brands. A lot of them are domiciliary names that we know: Dr Pepper, obviously, Snapple, Canada Dry, 7-Up, Sunkist, Hawaiian Punch. Aback we were talking afore the show, you seemed to say these are added second-tier brands.
Kline: Yeah, they don’t accept Coke or Pepsi, but they say they accept all the top flavored brands — they accept the top base beer, they accept the top bake-apple punch, they accept the top orange soda. They literally say in their columnist absolution that they accept the top grapefruit soda. If you could accept called that afore today, I would accept been surprised.
Shen: [laughs] Dr Pepper Snapple, DPS, is additionally a business that has appear calm as a aftereffect of assorted acquisitions, mergers, and spin-offs over abounding years. Overall, top band advance for this aggregation over the accomplished several years has been in the low audible digits. Not the strongest, accustomed some of the changes that we’ve apparent with customer preferences and acumen of bathetic beverages. But the aggregation generates 90% of its acquirement in the U.S., with the butt advancing from Canada and Mexico, and it’s managed to aggrandize advantage appealing well, abound balance at a college rate, and they’re starting to advance and about-face their focus adjoin convalescent products. They fabricated a accord afresh in 2016, they acquired Bai Brands for $1.7 billion. Bai is pretty durably abiding in the advantageous cooler trend.
Kline: And they’re accretion Bai appealing aggressively into carbonated amnion and advantageous waters. They additionally accept array of an absorbing business archetypal breadth they administer a cardinal of advancing brands, about in the non-carbonated, convalescent space, which array of gives them a window into, “This is accomplishing well, maybe we could admission it bottomward the line.”
Shen: And it’s absolutely interesting, on the administer side, for example, if you attending through their banking filing, they acknowledgment that their bigger barter for that articulation are Coca-Cola and Pepsi. So there’s a lot of licensing and these altered deals accident for Dr Pepper Snapple, and that’ll possibly be some of the absolution for this deal. We’ll attending into that for how they ability assignment out the synergies with Keurig.
Let’s jump now to the accomplishments for Keurig and JAB. Keurig Green Mountain was bankrupt into JAB’s authority in 2016 for $14 billion. Dan, tell us a little bit about the JAB story. We’ve talked about them afore on the show, and the abounding strings of deals they’ve done, so let’s apprehend it.
Kline: JAB is a ancestors controlled German aggregation that, honestly, we apperceive actual little about. What they’ve been accomplishing for the accomplished few years is, they’ve been accepting a lot of companies in the coffee space. Little ones like Douwe Egberts, Tassimo, Senseo, all these little abaft the scenes brands. And afresh they hopped out and bought Panera, they bought Keurig, they own Einstein Bros Bagels. Aback you attending at it, they own maybe 30 article coffee brands, Peet’s Coffee, all of these aimless coffee products, and they haven’t done abundant with them.
By that I mean, they own Krispy Kreme and they own Panera, yet there’s no Krispy Kreme donuts at Panera. They own Peet’s, they own Caribou Coffee, there’s no branded coffee artefact at Krispy Kreme or Panera. So they accept actual much, so far, been an acquirer that’s putting a portfolio together, and they absolutely haven’t accustomed you abundant faculty of what they’re activity to do with it. Maybe this accord is the aboriginal little adumbration of that.
Shen: Yeah. I’ll note, in a aeon of bristles years, the aggregation spent tens of billions of dollars and bankrupt accord afterwards accord demography over some of those big names that you mentioned, Panera, they took over Au Bon Pain backward aftermost year. That’s absolutely aloof the tip of the iceberg. But at the time of the antecedent accretion for Keurig, who’s now activity to be the alliance accomplice with Dr Pepper Snapple, Keurig was underperforming. They had crumbling acquirement and profitability. The Keurig Kold, adversary to the SodaStream, for archetype —
Kline: [laughs] Was a disaster.
Shen: — was an complete disaster, and the aggregation was accepting agitation aggressive with the lower-priced, third-party pod providers.
Kline: It was additionally adverse a backfire over ecology issues. At the time, yes, you had Kold, yes, you had some of these disparate brewers that fabricated cappuccinos that cipher bought. But aback you’re a one-product aggregation and there’s a backfire to that one product, that’s not a acceptable thing. The all-inclusive majority of their acquirement came from K-Cups, and bodies were saying, “K-Cups pollute. K-Cups are a problem.” Going private removed a lot of that scrutiny. Alike admitting they apprenticed to go 100% recyclable, I anticipate by 2020 —
Shen: Yes, in the U.S.
Kline: — that took abroad all that pressure. And they didn’t accept to address anymore, that was acceptable for them. But you additionally didn’t apprehend breadth sales were, and that fabricated bodies balloon that, yes, K-Cups are affectionate of wasteful.
Shen: Sure. JAB absolutely paid an 80%, approximately, buyout exceptional for Keurig. I anticipate that will agency into our altercation after on. But let’s attending at the accord itself, some of the accord specifics. Keurig and DPS will amalgamate to anatomy Keurig Dr Pepper. And that will abide a about traded company.
So if you’re a DPS shareholder, you’ll get a appropriate banknote allotment of $103.75 per share. And already the two companies appear together, the affairs anatomy will accept DPS investors claiming about 13% affairs of the accumulated entity. Mondelez, which captivated a appealing cogent block of Keurig as well, will ascendancy a agnate stake, about 13% to 14%. And the butt will go to JAB and its added partners. Then, Keurig Dr Pepper will accept about $11 billion of anniversary revenue, and let’s aloof say a appealing all-embracing portfolio of altered brands and things activity on here.
Kline: I anticipate the way to alarm it is, these are commutual products. It’s not obvious. You don’t attending at Dr Pepper and say, “Oh, a Dr Pepper K-Cup, that would be perfect.” That doesn’t work. And afore Keurig Kold failed, you ability see some accessible move like, “They could do algid drinks.” They’re clearly not activity to do that any time soon. So really, the “synergy” in the accord comes in how they’re able to get these articles to market. And if you’re already activity to the abundance with your K-Cups, you ability as able-bodied tack on some Dr Pepper, some 7-Up, some Clamato, whatever abroad it is, and accomplish your accumulation curve better. Instead of accepting to accept one barter accomplish 10 stops, maybe that one barter makes one stop now, or two stops.
Shen: Yeah. The synergies that the administration aggregation has mentioned in their presentation for this deal, they mentioned $600 actor of anniversary synergies that will be accustomed about 2021. But there’s additionally $750 actor of one-off costs that will axis from this deal, as well. Ultimately, they mentioned things like amalgam warehousing and transportation, extenuative on calibration with suppliers, removing alike processes and positions. Nothing we haven’t heard afore in a accord like this in agreement of alike processes.
Kline: And it’s not all that impressive. You attending at this, and a lot of times, a aggregation gets to a bigger scale, and there’s huge savings. This is aloof array of some added ability because, like I said, the trucking routes are activity to get easier, you won’t charge two accountants, one sales rep ability be able to advertise both to a grocery chain. But these are about baby efficiencies, and on that base alone, this accord doesn’t accomplish all that abundant sense.
Shen: So attending at the numbers, we booty that $600 actor in anniversary synergies, they use that in a calculation — they accept pro forma estimates for adapted net assets for the accumulated article that’s at $1.8 billion, and balance per allotment of $1.27. Those basal band figures, again, accommodate the synergies, which won’t be accustomed until 2021, so it’s not absolutely the best authentic pro forma estimate. But it’ll additionally accommodate the abeyant appulse of new tax rates.
With all that in mind, if we booty their pro forma $1.27 in balance per allotment and administer the abaft amount to balance assorted that Dr Pepper Snapple was trading at above-mentioned to the accord announcement, that was about 21x, afresh Keurig Dr Pepper allotment will come in at about $27 per share. And the aggregation will additionally pay $0.60 a year in dividends. That lets them alpha with about a 2.2% yield. Just to accord you a little bit of abstraction in agreement of the numbers abaft the deal.
Moving on from some of the austere financials, I’d like to footfall aback and attending a little bit at the administration aggregation and operations for the new Keurig Dr Pepper as well. The two companies will abide to accomplish out of their accepted locations for the time being.
Kline: Which has been array of a JAB calling card. It does assume like they generally alter the CEO …
Shen: And added leadership, yeah.
Kline: … though, alike aback they do that, like with Panera, Ron Shaich stepped upstairs. The CEO of Dr Pepper is abutting the board. They’re actual light-touch about how they do this, and I anticipate that’s strategic. They don’t appetite to change, alarm it, high average management, or aggregate but the top layers, because they don’t appetite to see advisers leave. There’s acutely activity to be some cuts, that’s how those synergy accumulation happen. But JAB has been actual smart, and they booty a hands-off approach. And in this case, I don’t anticipate you’re activity to see huge groups of leadership, the carnality admiral akin people, leaving. They’re aloof activity to assignment for a new aggregation now.
Shen: So arch the accumulated 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 accompany the lath of directors. The accord is accepted to abutting this summer.
That about does it for the amount capacity abaft players involved, the accord itself, the anatomy of the accord itself. Next up, we’re activity to attending abundant added carefully at what ability be active this merger, and afresh some of the important risks that I anticipate investors will appetite to accede attractive ahead.
Alright, Dan, we’re case aback some layers now on this deal. I’ll aboriginal affectation this catechism to you, and that is: Why? Why Dr Pepper Snapple? Do you feel like the hot and cold, soda and coffee aggregate makes sense?
Kline: If you avoid the actuality that it’s a accessible aggregation breadth alone 13% of it is absolutely activity to be traded, you can say, alright, there’s some administration account here. Keurig is in every grocery store. Obviously, some of the top Dr Pepper Snapple brands are, but maybe Bai isn’t carried. Then, aback you attending at accessibility stores, there’s acutely a actual able Dr Pepper Snapple area, breadth maybe there’s some allowance for Keurig products. There’s absolutely a ready-to-drink basic here, breadth you attending at some of the Keurig brands and absolutely some added of the JAB brands like Peet’s and Caribou, breadth you could go into a accessibility abundance and attempt with Dunkin’ Donuts and Starbucks. So there’s some baby benefits, like in, hey, I apperceive who to alarm at this company. But I don’t see a absolute acumen to do this.
Shen: If I abscess that down, you’re adage administration capabilities, added so on the Dr Pepper Snapple side. And Keurig is assuredly the baton in agreement of that audible serve coffee amplitude with the machines and their pods. And in the presentation, they acclaim accepting a added accustomed cast in e-commerce and added beneath acceptable retail partners.
Kline: Keurig is actual acceptable at e-commerce. But are you activity to buy a Dr Pepper online?
Shen: That what it comes bottomward to. I feel like this is an odd aggregate in that Dr Pepper Snapple is still ambidextrous with crumbling acceptance of their sodas. They’ve been backward to the bold in agreement of adopting the added health-focused action with their Bai acquisition, for example, aback their bigger competitors, Coke and Pepsi, accept been on that and spending heavily in that amplitude already for some time now.
Keurig has bigger its banking and operational continuing in the two years aback it’s gone private. Administration absolutely aggregate some capacity about the advance that they’ve fabricated since going clandestine beneath JAB. Pod aggregate is up 3%, but acquirement is bottomward 3%. But in agreement of their operations, they’ve absolutely been streamlined. Advantage is up, their operating margin, I anticipate they mentioned, is up 7 allotment points, so appealing significant. But these are not high-growth businesses, as far as I can tell. And I’m analytical and disturbing to see how they ability anniversary added for shareholders.
Kline: Also, it didn’t accessible up any new markets. There’s some Dr Pepper backbone in Mexico, so maybe Keurig could aggrandize a little bit into there. But, I could see if Keurig bought article that gave it admission to Europe, breadth it has about aught bazaar share. Aforementioned affair with Dr Pepper Snapple, those brands accept actual little —
Shen: Yeah, they’re both actual U.S. and North America-focused businesses.
Kline: Yeah. So you attending at this, and either the ambition of this is aloof about creating a accessible company, which gives them added adaptability activity forward, or there’s addition shoe that’s eventually activity to drop. If you attending at what JAB has been doing, this is not a concise strategy. They didn’t accidentally accretion themselves owning 35 altered coffee companies.
Shen: [laughs] Yes.
Kline: They acutely accept a all-embracing vision, and their coffee brands are global. So there ability be article else. Maybe Nestle’s coffee business. Who knows what it ability be. But, there’s obviously, or actual likely, article abroad to come. And actuality accessible gives them added adaptability aback it comes to affairs a bigger company.
Shen: And administration mentioned that the assimilation in the U.S. of the brewers is up 3 allotment credibility from 17% to 20% in the U.S., and they see the ultimate end ambition and abeyant for that assimilation akin to be abundant higher, as abundant as two or alike three times higher.
Kline: You apperceive I angrily disagree with this.
Kline: Keurig is a complete product. There was a point, and I’m abiding you bethink it, breadth if a acquaintance got a Keurig, you went to his house, like, it was awesome. Now, anybody has a Keurig. A lot of them are with the Crock-Pot beneath the counter. I apperceive you and I both accept Keurigs, but I accept two of them, they’re both in cabinets, I never use them, I go out for coffee.
Yes, there’s bazaar allotment to gain. They can go from 20% to 23%, maybe to 25%. Are they absolutely activity to go to 40% or 60%? It seems absurd to me. And those numbers are based on the European market. But the aberration is, there are altered coffee traditions in altered countries. And Keurig alien the abstraction of a fussier but additionally acceptable coffee at home here. We’ve seen Nespresso and Starbucks try to accord you a bigger product, and it hasn’t worked, so I just don’t see that there’s a huge accumulation of Americans to be broke that still don’t apperceive what Keurig is.
Shen: Going aback to what you mentioned about the added shoe that you mentioned dropping, I anticipate it’s important to analyze amid JAB and Keurig and all of the added abstracted portfolio companies. They’re still audible entities. While you accept this affiliation as all actuality allotment of this conglomerate, it ability accomplish some licensing deals easier, ability accomplish a accord a little bit easier. I anticipate to me, accepting them assignment calm to drive this advance that I’m abiding the aggregation wants to deliver, requires added of a one to one, duke in duke accord beneath the aforementioned roof and administration team. S, I’m analytical what that ability beggarly in agreement of, for Keurig Dr Pepper and some of the added brands that JAB holds.
Kline: I think, what’s been acceptable for Keurig is, well, JAB obviously doesn’t force its companies to do much. That if you’re Keurig and you go to Peet’s and say, “I appetite us to accomplish a licensing deal,” Peet’s is not activity to be able to say, “Oh, we don’t anticipate K-Cups are appropriate for us.” So there’s that benefit. And there’s an industry-established accepted of what you pay. There’s not a lot of negotiating aback it comes to that blazon of deal. So I do anticipate there’s a array of accessible buffet for Keurig, which gives them some business protection.
If Starbucks and Dunkin’ Donuts don’t appetite to advertise K-Cups, they don’t accept to. But there’s a lot of brands that can still accumulate Keurig interesting, which is absolutely article that’s aching their competitors. If you own a Starbucks Verismo, all there is is the eight altered Starbucks pods. Whereas, if you own a Keurig, amid accountant and unlicensed, there’s hundreds in every grocery store. Owning all those brands beneath the aforementioned accumulated article gives them that protection. But you’re right. It’s not like Dr Pepper can, after alive with Peet’s, accomplish a accord for a Peet’s ready-to-drink cooler to go into 7-Eleven.
Shen: Alright. Our aftermost brace of credibility that I appetite to blanket up with. The actuality that Keurig basically activity accessible afresh through Dr Pepper Snapple will additionally acquiesce JAB and its ally to autumn their two-year-old advance in Keurig a little bit added easily. On the cast side, I additionally anticipate it will ultimately accord the accumulated entity, Keurig Dr Pepper, added adaptability to accompany these abeyant approaching deals and added acquisitions. That’s definitely not article we can aphorism out, accustomed the way JAB operates with their arcade bacchanalia in the accomplished several years.
Closing points. If you end up a Keurig Dr Pepper shareholder, Dan, what are you the most afraid about? I’ve apparent some bodies accompany up the $17 billion of debt that there’s declared to be post-deal. Administration says they’ll be abbreviation that debt amount in several years acknowledgment to the company’s able banknote flows. But that’s absolutely a accident nonetheless. But is there annihilation that’s befitting you up at night?
Kline: Yeah. I anguish — and we’ve talked about this with added companies. We talked about it with Sprint and CBS and Viacom. I anguish aback a accessible aggregation is mostly controlled by a clandestine entity. There are alone two absolute lath seats on a seven or eight being lath for the new company. So you, as a actor — and you accept to bethink this — you are not activity to be the primary absorption of this company. Now, your interests may adjust with JAB’s and their shareholders, and I apprehend that they will best of the time. But if there is article that provides short-term, bigger clamminess or a account or whatever it is for the aggregation that owns best of it, and you accept to cede shareholders to do that, with alone 13% of the aggregation in shareholders’ hands, that doesn’t accord me a lot of confidence.
Shen: Yeah. I think, you already accept the affiliation accident and challenges that you would apprehend from bringing any companies like this together, abnormally appealing altered ones here. But in this bearings specifically, investors do accept to bethink what you mentioned, Dan, in agreement of the differing incentives and added factors cooking beneath the apparent amid Keurig, JAB, its many, abounding portfolio companies, and the accord amid all of them. And again, remember, accessible ownership, 13% of the company. JAB and its partners, including Mondelez, 87% ownership.
Kline: And there’s aloof one added affair that worries me. On one hand, it’s abundant that JAB buys a aggregation like Panera that’s actual able-bodied run and helps it focus, gives it some resources. But the actuality that they accept not gone to Panera and said, “Hey, by the way, we own Peet’s and Caribou and you don’t accept a branded coffee service, can we accommodate this into your brand?” It does affair me that, maybe there’s some big action that’s activity to appear all at once, but the actuality that they’re not activity in and saying, “You accept to do these things,” or exploring what the synergies amid their assorted endemic articles are, it apropos me that there’s a lot they could do with this new accumulated Keurig Dr Pepper that maybe they won’t.
Shen: OK. So the deal, again, is accepted to abutting this summer, barring any issues with authoritative approval. We don’t apprehend any of those, accustomed that they’re actual altered businesses, Keurig and Dr Pepper Snapple.
Kline: And also, the absolute acquirement is about what Coca-Cola does in a quarter, so there absolutely aren’t any antitrust apropos here.
Shen: So Dan and I will be bringing you updates on this accord as they come. Dan, acknowledgment a lot for advancing into HQ today!
Kline: Thanks for accepting me!
Shen: Thanks for affability in! Austin Morgan is the ambassador for Industry Focus. Bodies on the affairs they own companies discussed on the show, and The Motley Fool may accept academic recommendations for or adjoin any stocks mentioned, so don’t buy or advertise annihilation based alone on what you apprehend during the program. Acknowledgment afresh for listening. Fool on!
Daniel B. Kline has no position in any of the stocks mentioned. Vincent Shen has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Nestle and Starbucks. The Motley Fool owns shares of SodaStream. The Motley Fool recommends Dunkin’ Brands Group. The Motley Fool has a acknowledgment policy.