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Comment by gerdesj | Hacker News Reader

"The company would have $11 billion in annual revenue, the companies said. It also would have about $16.6 billion in debt. Wells Fargo analyst Bonnie Herzog estimates the combined company would be valued at about $33 billion."

Could someone please explain how on earth that adds up. I'll accept that when corp. valuations involve 10^9, then the usual rules of value might get a bit weird. Perhaps assets include a state or a slack handful of counties.

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-$16.6 billion in debt is a scalar and +$11 billion in annual revenue is a rate. But is all that revenue profitable?

It doesn't mention it in the article, but Dr. Pepper reports profit of about $1 billion per quarter and does not appear to be in any state of distress: https://finance.yahoo.com/quote/DPS/

What doesn't add up with the numbers you quoted? Being valued at higher than revenue isn't odd, that's a stocks vs. flows issue. Same with the debt, that's not too much relative to market cap.

Initially this sounded like AOL buys TimeWarner, but since it's a cash dividend that doesn't seem to be the explanation. I suspect there is a significant tax benefit as is often the case when a foreign company takes over an American one (known as a tax inversion).

When one company buys another it has to assume it's debt.

Enterprise value = equity + debt - cash on hand (and other adjustments sometimes)

So if a company has financed its growth with debt, you still have to pay for that if you're acquiring them so it adds to the valuation.

it's a ~4.5x multiple on revenue, minus debt. doesn't seem too outrageous to me?

edit: it's also almost $2bn less than the sum of the two individual companies market caps. (13.7bn for keurig, 21.1bn for dr pepper snapple)

Looks like a comparable revenue multiple to Mondelez (MDLZ), the demerged snacks business which emerged from Kraft post Cadbury Schweppes takeover. So this looks completely unremarkable. Interest rates are very very low, so the debt doesn't seem like an enormous deal.

A leveraged buyout is like a mortgage. When you get a mortgage for a house you have to prove income. When you buy a business using a loan you need to prove income from the business. $11 billion in revenue doesn't tell you much, what you need to know is net-revenue. That tells you how long it'll take to payoff the debt.

Presumably debt shrinks while revenue grows so as long as debt is within an order of magnitude or so of revenue it isn't really held against it.

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