Executive Summary / Key Takeaways

• Keurig Dr Pepper is embarking on a transformative two-step strategy: acquiring JDE Peet's to create a global coffee leader, followed by a separation into two independent, publicly traded companies.
• The acquisition of JDE Peet's will significantly scale KDP's coffee business, tripling net sales to $16 billion and establishing the world's largest pure-play coffee company, leveraging Keurig's innovation with JDE Peet's global reach.
• Post-acquisition, KDP has optimized its capital structure with $7 billion in strategic equity-like investments, including a Pod Manufacturing JV and Convertible Preferred Stock, aiming for net leverage below 5x at close and targeting investment-grade profiles for both new entities.
• The future "Beverage Co." is positioned as an agile North American challenger with over $11 billion in annual net sales, driven by iconic brands like Dr. Pepper and a rapidly expanding energy portfolio, supported by a robust direct store delivery (DSD) network.
• KDP delivered strong Q3 2025 results, with net sales up 10.7% and diluted EPS up 8.9%, and raised its full-year 2025 constant currency net sales outlook to high single-digit, reaffirming high single-digit adjusted EPS growth, demonstrating operational strength amidst a dynamic environment.

KDP's Evolving Beverage Empire: A Strategic Reimagining

Keurig Dr Pepper Inc. (KDP) stands at a pivotal juncture, reimagining its future as a leading force in the dynamic global beverage industry. Operating across hot and cold beverages and single-serve brewing systems, KDP's journey has been one of strategic evolution, culminating in a bold plan to unlock substantial shareholder value. The global beverage sector is a formidable $1 trillion market, projected to grow at a mid-single-digit compound annual growth rate (CAGR), fueled by ever-evolving consumer preferences for convenience, wellness, and functionality. KDP's foundational strengths, including a diversified portfolio of iconic brands and a competitively advantaged direct store delivery (DSD) network, have historically positioned it well within this landscape.

The company's history provides crucial context for its current strategic direction. Founded in 1981, KDP underwent a transformative period with the 2018 combination of Keurig and Dr Pepper Snapple Group (DPS Merger). This merger successfully created a scaled North American beverage challenger, with the refreshment beverage business alone growing to the size of the entire KDP at the time of the merger. However, as the market evolved, KDP recognized the need for further optimization, particularly within its coffee segment.

A cornerstone of KDP's competitive edge lies in its technological differentiation and innovation, particularly within its U.S. Coffee segment. The Keurig single-serve system is the undisputed leader in North America, dominating both brewers and pods. This proprietary technology offers tangible benefits to consumers through unparalleled convenience, a vast variety of brands and beverages via its open system, and a clear path to premiumization within the coffee category. The system has achieved significant household penetration, reaching 47 million active households in North America, and K-Cup pods are now the largest coffee format, driving twice the retail sales of the next closest format. Keurig.com further amplifies this advantage, serving as the fourth largest sales channel for brewers by volume and fostering direct relationships with over 1.5 million consumers monthly, who exhibit twice the daily consumption and a fivefold higher lifetime value compared to the average household. Operationally, the coffee business has consistently delivered an average of 4% in year-over-year cost savings through continuous productivity initiatives. Looking ahead, KDP is poised to disrupt the category once again with the upcoming Keurig Alta system, featuring plastic-free and aluminum-free K-rounds pods. This innovation is designed to offer a wide range of barista-style beverages, including rich cups of coffee, authentic espresso, and various hot or cold coffee shop-style drinks, with the stated goal of scaling this innovation beyond North America in the future. These technological advancements and the strategic intent behind them form a critical competitive moat, contributing to recurring revenue streams, supporting premium pricing, and driving long-term growth.

A Transformational Leap: Forging Global Coffee and Agile Beverage Leaders

KDP's latest strategic move, the acquisition of JDE Peet's , represents a bold and calculated step to address the evolving competitive landscape and unlock new avenues for growth. Management recognized that while its coffee business had strengths, it was not yet optimized to reach its full global potential. Scale is paramount in the coffee industry, which addresses a universal need state with common formats and consumer trends across markets, allowing for leveraged insights, innovation, and operational economies of scale. JDE Peet's, a scarce asset of global scale, offers a unique fit, bringing together Keurig's North American leadership and innovation prowess with JDE Peet's global reach, leading brands, and full-format expertise.

The future Global Coffee Co. will emerge as a formidable player. The combined entity will more than triple KDP's coffee net sales to $16 billion, making it the second-largest global coffee player and the largest pure-play, operating across over 100 countries. This expanded footprint will provide access to additional high-growth geographies and establish the company as the world's number one coffee buyer. The portfolio will be advantaged and complementary, diversified across formats (from whole bean to single-serve and ready-to-drink) and channels, aligning more closely with the global category split while retaining a favorable skew towards high-margin segments. Significant revenue opportunities are anticipated from expanding Keurig's system expertise and JDE Peet's format capabilities across more brands and markets. For instance, leveraging Keurig's commercial scale and customer relationships could significantly improve Peet's geographic footprint in the U.S., where Keurig currently achieves almost four times the feature and display activity of the Peet's brand. The next-generation Keurig Alta innovation also holds potential for expansion beyond North America. Furthermore, the combination is expected to yield $400 million in clear and actionable cost synergies over the first three years, spanning procurement, manufacturing, logistics, and selling, general, and administrative (SG&A) expenses. These synergies, coupled with JDE Peet's "Reignite the Amazing" strategy (targeting EUR 500 million in savings through 2032, with half reinvested), are expected to drive consistent, attractive profit growth. The long-term financial outlook for Global Coffee Co. projects low single-digit net sales growth and high single-digit adjusted EPS growth, supported by anticipated cumulative free cash flow exceeding $5 billion from 2026 to 2028.

Concurrently, the planned separation will establish Beverage Co. as a focused, growth-oriented, and agile challenger in the North American refreshment beverage market, boasting over $11 billion in annual net sales. This entity will be anchored by a powerful portfolio of iconic and emerging brands. Dr. Pepper, a flagship brand, is fast approaching $6 billion in annual retail sales and is on track for its ninth consecutive year of market share growth, having become the number two most consumed soft drink brand. Its success is driven by innovation, such as the Dr. Pepper Blackberry launch which quickly captured nearly a point of CSD share, and the expansion of its Zero Sugar platform. The energy portfolio, including GHOST, C4, Bloom, and Black Rifle , has rapidly grown from a negligible share to over 7.5% in the $28 billion energy category, with a clear line of sight to achieving a double-digit share in the coming years. In sports hydration, Electrolit stands as the number one player in the rapidly growing $2 billion rapid hydration segment, demonstrating over 30% growth. A key competitive advantage for Beverage Co. is its robust DSD network, one of only three national systems for nonalcoholic beverages in the U.S., covering approximately 80% of the population. This network provides critical access to convenience retail and on-premise channels, supported by digital tools like the "perfect daughter" application for optimizing order generation. The acquisition of Dyla brands further expanded KDP's presence in the $4 billion powdered drink mix and liquid water enhancer category, with 60% of Dyla's portfolio offering functional benefits. The Mexico business also contributes significantly, with over $1 billion in annual sales, led by the #1 mineral water brand, Peñafiel, and ongoing DSD expansion. Beverage Co. is expected to deliver mid-single-digit net sales growth and high single-digit adjusted EPS growth, generating over $6 billion in free cash flow from 2026 to 2028.

Financial Strength and Capital Structure Optimization

KDP's financial performance in 2025 underscores its operational strength ahead of this transformation. For the third quarter of 2025, net sales increased 10.7% to $4,306 million, driven by strong volume mix and net price realization. Gross profit rose 9.3% to $2,340 million, although partially offset by increased costs. Income from operations grew 10.3% to $995 million. Diluted earnings per share (EPS) increased 8.9% to $0.49. For the first nine months of 2025, net sales increased 7.3% to $12,104 million, and diluted EPS grew 9.5% to $1.27.

The company's liquidity remains robust, generating $955 million in free cash flow year-to-date, which, excluding a one-time $225 million GHOST distribution payment, would have exceeded $1.1 billion.

Recognizing initial market concerns regarding the leverage associated with the JDE Peet's acquisition, KDP has proactively optimized its capital structure. The company secured $7 billion in strategic equity-like investments in October 2025. This includes a $4 billion minority investment from a consortium of investors, including Apollo and KKR, into a newly created Pod Manufacturing Joint Venture, where KDP will retain a 51% controlling interest. The cost of capital for this JV investment is an attractive 7.3-7.4%. Additionally, KDP secured a $3 billion private convertible investment in its future Beverage Co., featuring a 4.75% preferred dividend and a conversion price of $37.25, representing a 6% premium to KDP's trading price prior to the acquisition announcement. These capital raises are expected to reduce net leverage to below 5x at the acquisition close, a significant improvement from initial projections. KDP is targeting initial net leverage ranges of 3.5x to 4x for Beverage Co. and 3.75x to 4.25x for Global Coffee Co. upon separation, with a commitment to delever at approximately 0.5 turn per year. The company's capital allocation priorities remain balanced, focusing on investing for growth, strengthening the balance sheet, and returning cash to shareholders through dividends (maintaining the current level across the two new companies) and opportunistic share repurchases, with $1.81 billion remaining under the current authorization.

Competitive Positioning and Market Dynamics

KDP's competitive standing is characterized by its strong position in specialized segments, leveraging its brand equity and technological advantages. In the carbonated soft drink (CSD) market, Dr. Pepper's consistent market share gains and status as the number two CSD brand highlight KDP's effective brand building and innovation, directly challenging larger players like The Coca-Cola Company (KO) and PepsiCo (PEP). While Coca-Cola and PepsiCo benefit from immense global scale and diversified portfolios, KDP differentiates itself with its unique coffee systems and a more agile approach to emerging beverage categories.

In the rapidly growing energy drink market, KDP's multi-brand strategy, encompassing GHOST, C4, Bloom, and Black Rifle (BRCC), has propelled its market share from nearly zero to over 7.5%, aiming for double-digit share. This positions KDP as a significant challenger to established players like Monster Beverage (MNST), which traditionally dominates the segment. KDP's DSD network provides a crucial competitive advantage, enabling superior retail presence and access to channels often underserved by warehouse direct models, a capability that even large competitors may not fully replicate for all product types.

Within the coffee segment, the Keurig system's technological leadership in single-serve brewing provides a strong competitive moat against traditional coffee players like J.M. Smucker (SJM). Keurig's focus on convenience, variety, and next-generation innovations like Keurig Alta offers a differentiated value proposition. The acquisition of JDE Peet's will elevate KDP to a global coffee powerhouse, enabling it to compete more effectively with international giants by combining Keurig's innovation with JDE Peet's extensive global brand portfolio and deep coffee expertise. This strategic move addresses a previous vulnerability of KDP's coffee business being subscale relative to global competitors.

However, KDP faces vulnerabilities, including potential dependencies on global supply chains, particularly for green coffee, which has seen triple-digit cumulative cost pressure on Arabica and Robusta. The ongoing antitrust litigation related to single-serve coffee brewers and pods, with claims exceeding $5 billion, also represents a significant risk. KDP's narrower product focus compared to highly diversified conglomerates like PepsiCo and Coca-Cola could expose it to greater category-specific risks. The company is actively evaluating mitigation strategies for tariffs, which are expected to be a prominent headwind, especially for the coffee business. Despite these challenges, KDP's strategic positioning, underpinned by its technological leadership in coffee and its robust DSD network, allows it to strategically respond to competitive forces and market trends, including the significant shift towards health and wellness, where 60% of KDP's portfolio now comprises "positive hydration" options.

Outlook and Risks

KDP has raised its 2025 constant currency net sales outlook to high single-digit growth, reaffirming its high single-digit adjusted EPS growth guidance. This outlook is supported by sustained momentum in U.S. Refreshment Beverages and International, coupled with the accretive impact of the GHOST acquisition. The JDE Peet's acquisition is expected to deliver approximately 10% EPS accretion in its first year. For the long term, Beverage Co. is projected to achieve mid-single-digit net sales growth and high single-digit adjusted EPS growth, while Global Coffee Co. is targeted for low single-digit net sales growth and high single-digit adjusted EPS growth. The company aims to be operationally ready for separation by year-end 2026, adopting a milestone-based approach to ensure optimal outcomes.

Despite this positive outlook, several risks warrant investor attention. The JDE Peet's acquisition faces customary closing conditions, including achieving a 95% tender offer acceptance (with 69% already committed) and securing regulatory approvals, which could delay or prevent its completion. The integration of JDE Peet's , a complex undertaking, may prove more challenging or costly than anticipated, potentially diverting management attention and impacting business relationships. The increased debt assumed for the acquisition has led to Moody's placing KDP's ratings under review for downgrade and S&P placing KDP on CreditWatch Negative, which could increase borrowing costs and affect liquidity. The Convertible Preferred Stock issuance also introduces potential dilution and covenants that could restrict operational flexibility. Furthermore, the planned separation itself carries risks, including the possibility of not achieving the anticipated strategic and financial benefits, and the potential for increased costs and business disruptions. KDP's exposure to geopolitical risks, particularly through JDE Peet's operations in countries like Russia, also presents a notable concern.

Conclusion

Keurig Dr Pepper is at the precipice of a transformative era, strategically repositioning itself to capitalize on the enduring appeal of beverages and coffee globally. The bold decision to acquire JDE Peet's (JDEP) and subsequently separate into two distinct, focused entities—a Global Coffee Co. and a Beverage Co.—is a testament to KDP's commitment to unlocking long-term shareholder value. This strategic narrative is underpinned by KDP's proven track record of operational excellence, its deep understanding of consumer trends, and its technological leadership in the single-serve coffee market.

The optimized capital structure, coupled with robust cash flow generation and clear deleveraging targets, provides a solid financial foundation for this ambitious undertaking. While the path ahead involves inherent execution risks and a dynamic competitive landscape, KDP's leadership team, with its extensive experience in complex transactions, is well-equipped to navigate these challenges. The creation of two specialized companies, each with tailored strategies and capital allocation priorities, is expected to foster greater agility, drive sustained growth, and offer investors distinct yet compelling investment opportunities, ultimately reinforcing KDP's position as a leading player in the global beverage industry.