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Investing.com -- HSBC downgraded Keurig Dr Pepper to Hold from Buy on Tuesday after the company announced the effective unwinding of its 2018 merger of Keurig and Dr Pepper through the acquisition of JAB’s coffee holding, JDE Peet’s.
“This deal looks too expensive,” HSBC wrote, cutting its discounted cash flow-based target price to $30 from $42. KDP shares closed down 11.5% following the announcement.
HSBC said the decision to separate the businesses “comes at a high acquisition cost” and will push leverage to about six times net debt to EBITDA.
“We don’t think KDP needed to lever itself up to 6-8x net debt/reported EBITDA to exit the Keurig coffee business,” analysts wrote.
While the move frees Dr Pepper to “move faster and more decisively on how it wants to evolve its route to market model,”
HSBC expressed concerns over execution. “But will it do it? How? When? How will it fix its distribution exposure to a weak Pepsi bottling system? Will it compel laggard Coke bottlers to step up their execution?” the note asked.
HSBC also questioned the valuation of the transaction, calling the 12.9x next year’s EV/EBITDA multiple “rich.”
The bank noted that KDP is targeting $400 million in synergies over three years, but contrasted this with reports of another European coffee asset, Costa Coffee, potentially trading at half its 2019 acquisition price.
“We have questions on the deleveraging schedule, how debt will be split between coffee and soft drinks after the two divisions are separately listed, and how much longer JAB’s influence will linger despite its reduced ownership at KDP,” HSBC said.