Keurig Dr Pepper’s (KDP) mega-purchase of JDE Peet’s has attracted a new player to its table.
Activist investor Starboard Value has taken a sizable share in the soft drink giant, building its stake in the weeks since the $18 billion acquisition of the global coffee conglomerate was announced on August 25.
First reported by Financial Times (FT) on Monday, Starboard has apparently been in private talks with KDP leadership with the goal of “improving execution and restoring investor confidence.”
Why it Matters
KDP’s blockbuster deal to cement itself as a global coffee leader seems like the kind of thing on paper that would excite shareholders.
Instead, investors balked at the 11-figure merger, driving KDP’s stock price to a four-year low – costing over $11 billion in valuation – amid concerns that the company was taking on far too much debt without a clearly defined plan.
KDP’s plan was, in essence, to functionally undo the 2018 merger that created the business by separating the soft drink and coffee divisions into two separate entities. Notably, soft drinks have been propping up earnings of late, as the coffee segment’s sales have been flat in recent quarterly reports and fell 2.6% to $4 billion last year.
It didn’t help that analysts crunched the numbers and offered a far less rosy outlook than what KDP told investors. Seeking Alpha analysts said the increased debt from the deal would result in a leverage ratio of 6x EBITDA – much higher than the 5.2x EBITDA that KDP had calculated.
Bloomberg suggested the “savage” response reflects a major shift in thinking on Wall Street which “challenges the idea that shifting assets into different corporate structures automatically creates value for shareholders.”
Starboard to the Rescue?
We don’t know how big Starboard’s stake in KDP is and, as FT noted, there’s no shareholder vote on the JDE Peet’s acquisition so the firm has no direct way to block the merger from going through.
Its exact demands to KDP were also not known, but the firm does have a track record of involving itself in corporate turnarounds, with past investments including Papa John’s Pizza and Olive Garden owner Darden Restaurants.
But, investors seem to support the Starboard news, as KDP stock price jumped over 2% this morning.