How Starboard could build value at Keurig Dr Pepper ahead of its JDE Peet deal

Company: Keurig Dr Pepper (KDP)

Business: Keurig Dr Pepper is a beverage company in North America that manufactures, markets, distributes and sells hot and cold beverages and single serve brewing systems. It has a portfolio of beverage brands, including Keurig, 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. Its U.S. refreshment beverages segment is a manufacturer and distributor of liquid refreshment beverages. This segment manufactures and distributes concentrates, syrup and finished beverages of its brands and third-party brands, to third-party bottlers, distributors, retailers and end consumers. Its U.S. coffee segment is a manufacturer and distributor of single-serve brewers, specialty coffee (including hot and iced varieties), and ready-to-drink coffee. Its international segment includes sales in Canada, Mexico, the Caribbean and other international markets.

Stock Market Value: $36.11 billion ($26.59 per share)

Activist: Starboard Value

Ownership: n/a

Average Cost: n/a

Activist Commentary: 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 diligence and for running many of the most successful campaigns. Starboard has taken a total of 161 prior activist campaigns in their history and has an average return of 21.49% versus 13.81% for the Russell 2000 over the same period.

What’s happening

Starboard has taken a position in Keurig Dr Pepper and has held meetings with the company’s management.

Behind the scenes

Keurig Dr Pepper is a leading North American beverage company. The core of the company is its U.S. refreshment beverage segment (63.9% of revenue), which includes the manufacturing and distribution of branded concentrates, syrups, and finished beverages. The U.S. coffee segment (22.77%) includes goods relating to Keurig pods, single-serve brewers and accessories, with the remaining revenue deriving from the international segment (13.33%). In January 2018, Dr Pepper Snapple Group and Keurig Green Mountain announced a merger, providing investors unique exposure to the fastest growing hot and cold beverage markets and their respective retail channels. However, this merger did not come without its challenges, including certain synergistic uncertainties.

Moreover, as a result of the merger, JAB Holdings — the owner of Keurig — became the majority owner of the combined company, reducing Dr Pepper shareholders to a minority stake of just 13%, and flooding KDP’s board with JAB affiliates. This dynamic changed earlier this year when three JAB-affiliated directors resigned following a series of divestures that reduced JAB’s ownership to below 10% — now 4.4% following an additional block sale.

As JAB began to turn over control and shareholders regained influence, investors began to advocate for a reseparation of the beverage and coffee assets. And management has responded — though not in the way shareholders expected — announcing a merger with coffee and tea company JDE Peet’s, followed by a separation of the beverage and coffee assets, now including both Keurig and Peet’s in the coffee business.

Coincidentally, or not so coincidentally, JAB owns a controlling 68% stake in JDE Peet’s.

The move shocked investors and sent KDP shares down 25% upon the announcement. It is not that shareholders don’t want a separation, but more the structure and negative consequences of the transaction as structured.

The logical way to have accomplished this would have been through a spin out of the coffee business by KDP into JDE Peet’s using a tax-free Reverse Morris Trust. This would be simpler, economically better for shareholders and make more sense since Keurig is smaller than Peet’s.

Instead, KDP structured it as an all-cash acquisition with a large premium and using an $18.5 billion loan to finance it, causing a projected leverage-to-earnings ratio of greater than 5x in 2026. Just as the Reverse Morris Trust would have been favorable to KDP shareholders, the structure ultimately agreed upon was as favorable, if not more, to JAB.

Starboard has entered this engagement in an unusual position. In the case of a pending strategic transaction, we typically see activists emerge where they can help influence or block a bad deal for shareholders. But that is not happening here — this is a cash deal, leaving KDP shareholders without a vote.

Starboard certainly has had extensive success operationally and from a board level with consumer and retail companies, including Kenvue, Papa John’s and Darden Restaurants, and we can see them adding significant value here. But the better analogy may be to Starboard’s prior engagement in Ritchie Bros Auctioneer, now RB Global. In that engagement, Starboard also became involved shortly after the company’s announced merger with IAA – a deal met with similar shareholder opposition. Starboard entered into a $500 million securities purchase agreement with the company that removed certain roadblocks and opposition to the merger, allowing it to consummate.

Importantly, Starboard was also granted a board seat for its CEO Jeff Smith, restoring a great deal of investor confidence in the company. By the time Smith resigned from RBA’s board less than two years later, the company’s stock had more than doubled.

Given this track record, Starboard’s involvement at KDP likely reflects a similar constructive approach, seeking board representation through amicable settlement, leveraging the fund’s expertise to help guide KDP behind the scenes through this inflection point and helping restore 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 at a compelling discount, similar to RBA, where short-term merger headwinds could provide significant upside for long-term and value-oriented shareholders like Starboard.

KDP’s nomination deadline is not until February, but we do not think that will be relevant here as meetings have already taken place between Starboard and management and we expect an amicable resolution before then.

Ken Squire is the founder and president of 13D Monitor, an institutional research service on shareholder activism, and the founder and portfolio manager of the 13D Activist Fund, a mutual fund that invests in a portfolio of activist investments.