What do I mean by going against the grain?
How about the fact that when these two companies combine you get a $103.75 special dividend and a stub, when you subtract that dividend of about $13, that will give you the right for $1.27 in earnings power and a $0.60 dividend.
It will immediately become the cheapest growth company in the consumer packaged goods business, with a best-in-class yield and an opportunity for much higher earnings in the outyears.
Why, then, you might ask, is this new company -- to be 13% owned by Dr Pepper Snapple, the rest owned by JAB Holdings, a German private equity firm -- selling at such a ridiculously low price if it sounds so darned good to me?
Couple of reasons. First, the analysts seemed pretty stunned and negative, for that matter, when they analyzed the deal on the fly yesterday. You could cut their skepticism with a meat axe. They could see no real revenue synergies between a company that sells a device that sits in your kitchen and is used in the morning to make hot drinks with a company that sells cold drinks that are meant for the afternoon and evening.
That vision of every day part covered, propounded by management several times in its call, didn't inspire any confidence at all.
Second, there's no hiding it: you are, in the end, going against a renewed Coca Cola (KO) and a fantastic PepsiCo (PEP) (a holding in Action Alerts PLUS, the charity portfolio that I co-manage), and teaming up with a coffee maker isn't all that spectacular a way to take those two giants on.
Third, the carbonated category is not known for growth, although Dr Pepper's brands away from Schweppes, Canada Dry and Dr Pepper, 7Up, namely Bai, the enhanced water company and Snapple itself have plenty good prospects.
So why the heck do I like it?
Bob and Gamgort.
Gamgort, the new CEO of the enterprise, is a miracle man in what many believe is a dying industry: consumer packaged goods. Gamgort's a finance guy with a knack for creating and nourishing brands, both old and new. He spent 10 years at the privately held Mars, where many credit him with taking that discombobulated family business into something that actually looked like a high-functioning consumer packaged goods company.
After clashing with the president of Mars Global, he moved over to Pinnacle Foods -- an also-ran flotsam and jetsam company owned by Blackstone (BX) , that counted Birds Eye, Vlasic and Duncan Hines among many other old-timer "pantry" brands.
Talk about moribund.
And that's what most thought when the company came public at $20 in March of 2013. I backed it because I was aware of what Gamgort had done at Mars. Sure enough, as investors ignored what many thought to be a real dog with dying brands, Bob took the company's shares to $43 three years later, when the S&P was up about 30%, and then he moved on to Keurig after the privately held German company JAB bought the coffee maker.
I couldn't believe it when he did, because Keurig was a terrible shambles. It had the most unfocused growth strategy. I can't even articulate it. There were shorts all over the place that got caught in the shockingly high bid, because the company was doing so badly.
Fast forward to now, though, and with the first public look we got of the company, Gamgort seems to have performed another miracle, getting Keurig into a focused, growing and profitable company in two years' time. Even better, it's got a balance sheet that's been fixed up and ready for duty, duty that is to acquire at will.
This new company will be Gamgort's vehicle for acquisitions. He has done 11 major mergers in his 30-year career, and from what I can tell, he's more successful than just about anyone else in doing so.
Now, I have to admit I was suspicious of the reasoning. Keurig has an excellent e-commerce channel besides regular distribution. Dr Pepper has a fantastic convenience and supermarket distribution. So what?
But that's thinking too small. You are getting a public way to play Gamgort at about 10 times earnings and a $0.60 dividend to wait while he works his magic. Hey, they all laughed when Pinnacle PF came public. This one's better than that. If Gamgort weren't involved, candidly I'd have nothing to do with this one.
But he is, so I want everything to do with it. Yep, he is that good, and he will use this new company to create the same kind of value he did at Pinnacle. Let others run away; I want to run to Keurig Dr Pepper, just like last time. Once more into the CPG breach, for this great manager.