Keurig Dr Pepper Stock Tumbles After Peet’s Coffee Deal. Here’s Why.

(Stefani Reynolds/Bloomberg)

Keurig Dr Pepper plans to acquire Dutch tea and coffee giant JDE Peet’s and then split into two public companies. So far, investors don’t seem to be warming up to the idea.

Keurig Dr Pepper stock plunged 11.5% on Monday after the $18 billion deal was announced, and another 5.6% on Tuesday. The shares might not get a reprieve soon.

The stock will likely stay under pressure in the near-to-intermediate term as the market wrestles with the surprising move, UBS analyst Peter Grom wrote in a Tuesday note.

To start with, investors are worried that the deal, which will be funded with a combination of new debt and cash, could hurt Keurig Dr Pepper’s balance sheet. Moody’s has placed the company under review for a potential credit downgrade, although management expects to retain investment grade rating.

After the deal is complete, the company will split into two publicly traded entities—one for its U.S.-centric beverage business and another combining the coffee business of both firms.

Investors might be wondering whether just a spinoff of the less attractive Keurig segment is a better strategic move for Keurig Dr Pepper, rather than expanding the coffee business with the JDE Peet’s deal, wrote Grom. The Keurig coffee business has been under pressure as at-home demand slows down and higher coffee bean prices pressure margins.

Management says the coffee business is still worth keeping and expects the deal to add greater scale across geographies, thanks to JDE Peet’s international footprint. This could lead to an estimated $400 million in cost synergies and help boost earnings, the company said.

Still, “the deal will require patience given its high profile/complexity and several international and U.S. regulatory approvals and, as a result, investors will likely not have visibility on the synergies until the end of next year at the earliest,” wrote JPMorgan analyst Andrea Teixeira.

Another concern: Keurig Dr Pepper is paying a 33% premium to JDE Peet’s 90-day volume-weighted average stock price.

“It looks like a relatively pricey way to gain more scale, geographic scope and synergies,” wrote Teixeira.

The remaining beverage company, meanwhile, will be focused on growth—the spinoff will allow for more capital investments, especially in high-growth categories like energy drinks and hydration. Dr Pepper has already been gaining traction in recent years and surpassed Pepsi to become the second most popular soda brand in the U.S.

Keurig Dr Pepper projects that the post-split beverage company will generate $11 billion in net annual sales. The company says the newly formed coffee business—which would include the Peet’s, Jacobs, Douwe Egberts, and Keurig portfolios—would generate about $16 billion in annual net sales.

Although the acquisition is expected to boost earnings, investors will likely question how the two split entities would trade on a stand-alone basis, Grom said. Teixeira says the stock now trades at an attractive valuation after Monday’s selloff. She has an Overweight rating with a $39 price target, while Grom has a Buy rating with a $40 price target.

Keurig Dr Pepper shares are trading around $30 as of Tuesday.

Write to Evie Liu at evie.liu@barrons.com