How Starboard could build value at Keurig Dr Pepper ahead of its JDE Peet deal
POLAND – 2024/12/08: In this photo illustration, the Keurig Dr Pepper company logo is seen on a smartphone screen. (Photo Illustration: Piotr Swat/SOPA Images/LightRocket via Getty Images)
Stick Pictures | Light Rocket | Getty Images
Company: Keurig Dr Pepper (KDP)
Business: Keurig Dr Pepper It is a beverage company that manufactures, markets, distributes and sells hot and cold beverages and single-serve brewing systems in North America. Keurig has a portfolio of beverage brands that includes Dr Pepper, Canada Dry, Mott’s, A&W, Penafiel, Snapple, 7UP, Green Mountain Coffee Roasters, GHOST, Clamato, Core Hydration and The Original Donut Shop, as well as the Keurig brewing system. The US refreshing beverages segment is a manufacturer and distributor of liquid refreshing beverages. This segment produces and distributes its own and third-party brands’ concentrates, syrups and finished beverages to third-party bottlers, distributors, retailers and end consumers. The U.S. coffee segment is a producer and distributor of single-serve brewers, specialty coffee (including hot and iced varieties), and ready-to-drink coffee. The International segment includes sales in Canada, Mexico, the Caribbean and other international markets.
Stock Market Value: $36.11 billion ($26.59 per share)
Keurig Dr Pepper’s year-to-date stock performance
Activist: Flag Value
Ownership: no
Average Cost: no
Activist Comment: Starboard is a very successful activist investor and has extensive experience helping companies focus on operational efficiency and margin improvement. They are known for their excellent efforts and running many of the most successful campaigns. Starboard has run a total of 161 activist campaigns in its history, posting an average return of 21.49% versus the Russell 2000’s average return of 13.81% over the same period.
what’s going on
Starboard took part in Keurig Dr Pepper and held meetings with company management.
behind the scenes
Keurig Dr Pepper is one of North America’s leading beverage companies. The core of the company is the US refreshing beverage segment (63.9% of revenue), which includes the production and distribution of branded concentrates, syrups and finished beverages. The US coffee segment (22.77%) includes products related to Keurig pods, single-serve brewers and accessories, while the remaining revenue comes from the international segment (13.33%). In January 2018, Dr Pepper Snapple Group and Keurig Green Mountain announced a merger that will provide investors with unprecedented access to the fastest-growing hot and cold beverage markets and related retail channels. However, this merger was not without some challenges, including some synergistic uncertainties.
Moreover, as a result of the merger, Keurig owner JAB Holdings became the majority owner of the combined company, reducing Dr Pepper shareholders to just a 13% minority stake and filling KDP’s board with JAB affiliates. This dynamic changed earlier this year when three JAB executives resigned following a series of disposals that reduced JAB’s ownership to less than 10%; this rate is currently 4.4% following an additional block sale.
As JAB began to cede control and shareholders regained influence, investors began to advocate for a reallocation of its beverage and coffee assets. And management responded, though not in the way shareholders expected, by announcing a merger with coffee and tea company JDE Peet’s and then announced the separation of its beverage and coffee assets; now both Keurig and Peet’s are in the coffee business.
Coincidentally or not coincidentally, JAB owns a 68% controlling interest in JDE Peet’s.
This move shocked investors and caused KDP shares to fall 25% following the announcement. This is not because shareholders do not want to leave, but rather because the structure of the transaction and its negative consequences are structured.
The logical way to achieve this would have been for KDP to convert its coffee business into JDE Peet’s using the tax-exempt Reverse Morris Trust. This would be simpler, better economically for shareholders, and make more sense since Keurig is smaller than Peet’s.
Instead, KDP structured it as an all-cash buyout at a large premium and used an $18.5 billion loan to finance it, resulting in a projected leverage-to-earnings ratio of more than 5x in 2026. Just as the Reverse Morris Trust would have been favorable to KDP shareholders, the structure ultimately agreed upon was equally, if not more, favorable to JAB.
Sancak entered this conflict in an unusual position. In the case of a pending strategic transaction, we often see activists emerge who can help influence or prevent a bad deal for shareholders. But that doesn’t happen here; This is a cash deal, leaving KDP shareholders without voting rights.
Starboard has certainly had great success operationally and at the board level with consumer and retail companies. Kenvue, Papa John’s And Darden Restaurantsand here we can see that they add significant value. But a better analogy might be Starboard’s previous relationship with Ritchie Bros Auctioneer, now RB Global. Starboard was also involved in this deal shortly after the company’s merger with IAA was announced; this deal faced similar opposition from shareholders. Starboard signed a $500 million securities purchase agreement with the company, which removed some of the hurdles and opposition to the merger and allowed the merger to be completed.
More importantly, Starboard also gave CEO Jeff Smith a board seat, restoring much of investors’ confidence in the company. When Smith resigned from the RBA board less than two years later, the company’s shares had more than doubled.
Given this track record, Starboard’s participation in KDP likely reflects a similar constructive approach; is seeking board representation through an amicable resolution, drawing on the fund’s expertise to help guide KDP behind the scenes through this milestone and helping to regain investor confidence among this rightfully skeptical shareholder base.
Moreover, given the recent decline in KDP’s share price, Starboard likely sees this entry as an opportunity to invest in a compelling discount similar to the RBA; Here, short-term merger tailwinds could provide significant upside for long-term, value-oriented shareholders like Starboard.
KDP’s nomination deadline is not until February, but as meetings have already taken place between Starboard and management, we don’t think that will be relevant here and expect an amicable resolution before then.
Ken Squire is the founder and president of 13D Monitor, a corporate research service on shareholder activism, and the founder and portfolio manager of the 13D Activist Fund, an investment fund that invests in a portfolio of activist investments.
