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Early Returns Look Bad For Keurig/Dr. Pepper Snapple’s Merger

MIAMI, FL – JANUARY 29: Bottles of Dr Pepper drinks are seen on a store shelf on the day Keurig Green Mountain announced it has struck a deal worth more than $21 billion with Dr Pepper Snapple Group Inc. on January 29, 2018 in Miami, Florida. The new company will be known as Keurig Dr Pepper. (Photo by Joe Raedle/Getty Images)Getty

My latest featured stock is a beverage giant formed via merger in 2018. I pulled this highlight from last week’s research of 659 10-K filings.

Analyst Cody Fincher found several unusual items in the footnotes of Keurig Dr. Pepper’s (KDP) 2018 10-K.


KDP was formed when privately held Keurig acquired Dr. Pepper Snapple in July of 2018, and the combined company began trading under the symbol KDP. As shown in Figure 1, Dr. Pepper Snapple earned consistently high returns on invested capital (ROIC), but the combined KDP earned an ROIC of 4% in 2018, which is below its weighted average cost of capital (WACC) of 4.5%.

Figure 1: ROIC vs. WACC for Dr. Pepper Snapple/KDP Since 2013

ROIC vs. WACC Keurig & Dr. Pepper SnappleNew Constructs, LLC

In order to calculate the combined company’s ROIC, I made three significant adjustments related to the merger. The two major income statement adjustments were:

  • The removal of $131 million (2% of revenue) in inventory step-up costs disclosed on page 81
  • The removal of $170 million (2% of revenue) in integration costs disclosed on page 113

KDP reported GAAP net income of $589 million in 2018, but my adjustments show that it earned net operating profit after tax (NOPAT) of $1.1 billion.

On the balance sheet side, I made a midyear acquisition adjustment to account for the fact that the merger closed in the middle of 2018. KDP had ~$46 billion in invested capital at the end of 2018 (96% of which consisted of goodwill and other intangibles), while Dr. Pepper Snapple started the year with ~$10 billion in invested capital. A simple average of these two numbers would yield $33 billion, but since the acquisition closed slightly more than halfway through the year I adjust and calculate the combined company’s average invested capital of ~$27 billion.

These adjustments help strip out the accounting distortions surrounding the KDP merger and reveal that the combined company is failing to create value for shareholders. Executives will claim there are still “synergies” to be realized, but research shows that few acquisitions actually deliver the promised synergies. On the evidence we have so far, it appears that Keurig overpaid for Dr. Pepper Snapple.


Critical Details Found in Financial Filings by My Firm’s Robo-Analyst Technology

In total, I made the following adjustments to Keurig Dr. Pepper’s 2018 10-K:

Income Statement: I made $1.1 billion of adjustments, with a net effect of removing $492 million in non-operating expense. I removed $303 million in non-operating income and $795 million in non-operating expense. You can see all the adjustments made to KDP’s income statement here.

Balance Sheet: I made $21.3 billion of adjustments to calculate invested capital with a net decrease of $16 billion. You can see all the adjustments made to KDP’s balance sheet here.

Valuation: I made $22.2 billion of adjustments with a net effect of decreasing shareholder value by $22.2 billion.

The Power of the Robo-Analyst


I pulled this highlight from last week’s research of 659 10-K filings, from which the Robo-Analyst technology collected 72,984 data points. The analyst team used this data to make 15,056 forensic accounting adjustments with a dollar value of $6 trillion. The adjustments were applied as follows:

  • 5,859 income statement adjustments with a total value of $375 billion
  • 6,525 balance sheet adjustments with a total value of $2.6 trillion
  • 2,672 valuation adjustments with a total value of $3 trillion

Figure 2: Filing Season Diligence for Week of February 25-March 3

Filing Season Stats Week 2New Constructs, LLC

Every year in this six-week stretch from mid-February through the end of March, my firm parses and analyzes roughly 2,000 10-Ks to update models for companies with 12/31 and 1/31 fiscal year ends. This effort is made possible by the combination of expertly trained human analysts with what I call the “Robo-Analyst.” Featured by Harvard Business School in “Disrupting Fundamental Analysis with Robo-Analysts”, this research automation technology uses machine learning and natural language processing to automate robust financial modeling.


Disclosure: David Trainer, Cody Fincher, and Sam McBride receive no compensation to write about any specific stock, sector, style, or theme.

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