Dr Pepper Snapple-Keurig Union Should Brew Up Results

We’re placing our fair value estimate for wide-moat

The transaction is expected to close in the second quarter of 2018, after which Dr Pepper shareholders will receive a special dividend of $103.75 and in aggregate will own 13% of the shares of the combined entity. The combined firm, Keurig Dr Pepper, will have annual revenues around $11 billion (versus our $6.7 billion expectation for Dr Pepper in fiscal 2017), which remains materially below those of key competitors Coca-Cola ($42 billion in sales in fiscal 2016) and Pepsi ($63 billion in fiscal 2016). We view the special dividend to be a sufficient, guaranteed return to shareholders (representing an 8% premium to the stock’s last closing price), and appreciate the strategic rationale of the tie up, from both a distribution and product mix (lessened exposure to carbonated soft drinks, which we estimate accounts for 80% of its volume, versus 60%-70% for Coca-Cola and Pepsi’s beverage business) perspective.

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