HSBC downgrades KDP rating, finding JDE Peet deal 'too expensive'

Investing.com — HSBC downgraded Keurig Dr Pepper from AL to TUT on Tuesday. This decision follows the company's announcement to effectively end the 2018 merger of Keurig and Dr Pepper by acquiring JDE Peet's, JDE's coffee conglomerate.

HSBC wrote: “This deal looks very expensive.” The bank lowered its target price based on reduced cash flow from $42 to $30. KDP shares closed down 11.5 percent following the announcement.

HSBC said its decision to spin off the businesses “came at a high cost of acquisition” and its leverage would increase net debt by about six times as much as EBITDA.

The analysts wrote: “We do not think KDP needs to increase its net debt/reported EBITDA ratio by 6-8 times to exit the Keurig coffee business.”

While this move enables Dr Pepper to “move more quickly and decisively on how it wants to improve its model of transportation to market”,

HSBC has raised concerns about the practice. The note included the following questions: “But will he do that? How? When? How will it fix the distribution exposure to the weak Pepsi bottling system? Will it force the remaining Coca Cola bottlers to improve their performance?”

HSBC also questioned the valuation of the transaction, calling next year's EV/EBITDA multiplier of 12.9 “high”.

The bank said KDP is targeting $400 million in synergies within three years. However, he drew comparisons with reports that another European coffee asset, Costa Coffee, could be traded for half the purchase price in 2019.

HSBC said: “We have questions about how debt will be split between coffee and soft drinks when the debt reduction calendar is listed separately in the two sections, and how long the impact of JAB will last despite its declining ownership in GDP.”

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