Dr Pepper Snapple Group Inc., Plano, Texas, and Keurig Green Mountain Inc., Burlington, Mass., announced that the companies have entered into a definitive merger agreement to create Keurig Dr Pepper (KDP), a new beverage company of scale with a portfolio of iconic consumer brands and unrivaled distribution capability to reach virtually every point-of-sale in North America, the companies say.
Under the terms of the agreement, which has been unanimously approved by the Dr Pepper Snapple Board of Directors, Dr Pepper Snapple shareholders will receive $103.75 a share in a special cash dividend. Upon closing of the transaction, Keurig shareholders will hold 87 percent and Dr Pepper Snapple shareholders will hold 13 percent of the combined company.
KDP will have pro forma combined 2017 annual revenues of approximately $11 billion. This combination of two iconic beverage companies joins together such brands as Dr Pepper, 7UP, Snapple, A&W, Mott’s and Sunkist with coffee brand Green Mountain Coffee Roasters and the Keurig single-serve coffee system, as well as more than 75 owned, licensed and partner brands in the Keurig system.
Bob Gamgort, current chief executive officer of Keurig, will serve as chief executive officer of the combined company, and Ozan Dokmecioglu, current chief financial officer of Keurig, will serve as its chief financial officer. Dr Pepper Snapple President and Chief Executive Officer Larry Young intends to transition to a role on KDP’s Board of Directors to help the new management team realize the full potential of the company.
Bart Becht, of JAB, will serve as chairman of the company’s Board of Directors, and Gamgort will become an executive member of the board. Four additional directors will be appointed by JAB, two directors will be appointed by Dr Pepper Snapple, including Young, two directors will be appointed by Mondelēz International, and two independent directors will be appointed, the companies say.
Keurig and Dr Pepper Snapple will continue to operate out of their current locations. As chief executive officer of the combined company, Gamgort will continue to be based in Burlington, Mass. The combined company will draw on the leadership teams of both companies, who will continue running their respective businesses.
“This transaction will deliver significant and immediate value to our shareholders, along with the opportunity to participate in the long-term upside potential of our combined company and attract new brands and beverage categories to our platform in a fast-changing industry landscape,” Young said in a statement. “We are excited to combine with Keurig to build on the rich heritage and expertise of both companies and provide the highest-quality hot and cold beverages to satisfy every consumer throughout the day.”
KDP targets realizing $600 million in synergies on an annualized basis by 2021. Dr Pepper Snapple expects to pay its first quarter ordinary-course dividend of $0.58 a share. At the close of the transaction, the company expects to deliver an annual dividend of $0.60 a share.
The company will deliver strong cash flow generation and accelerate its deleveraging, with a target Net Debt/EBITDA of below 3 times within two to three years after closing. KDP anticipates total net debt at closing to be approximately $16.6 billion and it anticipates maintaining an investment grade rating, it says.
“Our view of the industry through the lens of consumer needs, versus traditional manufacturer-defined segments, unlocks the opportunity to combine hot and cold beverages and create a platform to increase exposure to high-growth formats,” Gamgort said. “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. We are fortunate to have talented leadership teams within both companies, and I look forward to working together with the Dr Pepper Snapple team to make this combination a success for all of our stakeholders.”
Becht added: “We are very excited about the prospect of KDP becoming a challenger in the beverage industry. Management’s proven operational and integration track record along with their commitment to innovation and potential future brand consolidation opportunities, while maintaining an investment grade rating, positions the company well for long-term success and material shareholder value creation.”
Dirk Van de Put, chief executive officer of Deerfield, Ill.-based Mondelēz International, which will have a significant stake in KDP, said: “We have been very pleased with our coffee partnership with Keurig and strongly support the strategic rationale for this transaction. We look forward to continuing to participate in the compelling value-creation and long-term growth opportunities inherent in this powerful beverage platform.”
Since becoming a private company following its acquisition by a JAB-led investor group in March 2016, Keurig has renewed its marketing investment and improved its new brewer innovation pipeline, which has resulted in renewed top-line volume growth, increasing U.S. household penetration for Keurig brewers to 20 percent from 17 percent in the last two years, it says. In the same period, Keurig has added brand partners into the Keurig system with the help of strategic pod price reductions and value-added services. The combination of those two factors has allowed the company to improve its pod growth from the low-single digits to mid-single digits in the second half of calendar year 2017, it states.
Keurig also delivered a 14.1 percent annual improvement in operating income and increased its operating margin by 710 basis points in the last two years behind significant productivity improvement programs. The company has also strengthened its balance sheet and significantly reduced its debt/EBITDA to 2.7 times as of December 2017, from 5.5 times as of March 2016, when the company was acquired, it says.
JAB Holding Co. and its partners will together make an equity investment of $9 billion as part of the financing of the transaction. JAB will be investing equity capital from JAB Holding Co. as well as through JAB Consumer Fund, an investment fund backed by a group of like-minded, long-term oriented investors. Both JAB Holding Co. and JAB Consumer Fund are overseen by three senior partners: Peter Harf, Becht and Olivier Goudet. Entities affiliated with BDT Capital Partners, a Chicago-based merchant bank that provides long-term private capital and advice to closely held companies, also are investing alongside JAB. Upon closing of the transaction, JAB will be the controlling shareholder. Mondelēz International, JAB’s partner in Keurig, will hold approximately a 13-14 percent stake in the combined company.
The balance of the transaction financing will be provided through financing debt commitments from JPMorgan Chase Bank, Bank of America Merrill Lynch and Goldman Sachs. The transaction is not subject to a financing condition and is expected to close in the second calendar quarter of 2018, subject to the approval of Dr Pepper Snapple shareholders and the satisfaction of customary closing conditions, including receipt of regulatory approvals, it says.