EU CONSUMER CYCLICALS: JDE Peet's: revisit to yesterday's transaction (reblast)

KDP stock -18% this week despite no equity financing and a guided to unch dividend policy. Questions may remain why it paid a premium to acquire a Coffee co only to spin it-off. JAB (Baa1 Neg/BBB), the investment holdco that a hand in both, may come out as a more clear winner.
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We view this as credit negative for JDE. Investors have some HY rating protection on lower cash px bonds from CoC - but the bar to trigger it is high and it likely had Fitch strategically initiate on it for this reason. We do expect supply for ~€16b funding need - it is flagging Euros is lower rate/attractive in the investor call.

Yesterday Keurig Dr Pepper. a $60b Yankee co, announced it would acquire one of the world's largest coffee producers, JDE Peet's (a Dutch co) for $23b. It will combine it with the Keurig/coffee side of its business and then spin it off leaving only the Dr Pepper/soft drink business - seven years after it merged the two. The important;

• The $23b purchase price includes €15.7b ($18.3b) in equity that will be entirely debt financed.
• JDE Peets existing debt will be kept leaving a ~€15.7b funding need.
• The transaction is highly levered -> KDP is currently high 3x levered, JDE Peets mid 2x. Pro-forma we see the combined co low 6x levered. It is managing this down to high 5x by mixing in jnr sub debt that will receive 50% equity treatment at the rating agencies.
  • It is quoting a move from 3.3x to 5.2x - but is including expected earnings growth into next year (at KDP) and year-1 cost synergies.
• To enable CoC all ratings must be non-IG within the Change of Control period (180 days after a Change of Control).
• For now all three agencies are guiding to BBB- ratings. Acquirer/KDP is committing to IG ratings both through the acquisition and for each of the two entities post spin-off.
• Agencies are quoting ~$1.5-2.0b FCF after dividends (it is guiding to unch dividend policy) -> that is 0.25-0.35x/yr in deleveraging powder.
• The headroom for any earnings weakness here is small.