GMCR (MM)

By Annie Gasparro 

JAB Holding Co. said it is buying Keurig Green Mountain Inc. for $13.9 billion in the biggest coffee deal on record, adding the U.S. pioneer of single-serve pods to the European investment firm's global coffee empire.

Closely held JAB agreed to pay a 78% premium for Keurig's shares, which have fallen sharply over the past year amid troubled product launches and other challenges. That represents the second-highest premium paid this year among deals valued over $1 billion, according to Dealogic, which also said the deal is the biggest acquisition in the packaged-coffee or cafe sectors.

JAB's purchase offers new life to Keurig as its struggles with declining sales, and renders profitable the stake held by Coca-Cola Co., its largest shareholder, which found its stake nearly $1 billion underwater as of Friday.

The acquisition, announced Monday, is a major doubling down on coffee for JAB, which manages the money of one of Germany's wealthiest families, the Reimanns.

The investment firm, which also owns other assets including luxury brands Bally and Jimmy Choo PLC and beauty-products maker Coty Inc., is betting that adding Keurig's technology and its reach in the U.S. to its current holdings can make it a stronger rival to competitors including Nestlé SA, the world's largest packaged-coffee company.

Keurig has a roughly 20% share of the packaged-coffee market in the U.S., according to Euromonitor International Inc.--although it shares some of its revenue with brands like Starbucks Corp. whose coffee it packages into its K-Cups. Stifel Capital Markets estimated that adding Keurig would increase JAB's share of the $80 billion global market for packaged coffee to mid-to-high-teens percentage, compared with a mid-20s percentage for Nestlé.

Buying Keurig could help JAB further its mission to become "the Bud(weiser) of the coffee space," said Susquehanna Financial Group analyst Pablo Zuanic.

JAB said little about its plans beyond a statement in which Chairman Bart Becht said the deal "represents a major step forward in the creation of our global coffee platform."

He said Keurig is "a fantastic company that uniquely brings together premium coffee brands" and its single-serve technology for machines and pods. Keurig will operate as an independent entity after the deal, he said.

The acquisition follows a string of other coffee-related deals for JAB. It bought U.S.-based chains Caribou Coffee Co. and Peet's Coffee & Tea in 2012, then last year acquired the parent company of Einstein Bros. Bagels. This year JAB acquired two upscale, niche players in the U.S., Stumptown Coffee Roasters and Intelligentsia Coffee Inc.

JAB, this year, also merged its D.E. Master Blenders brand with the international coffee business of U.S. snack-food maker Mondelez International Inc.

Analysts said JAB could see opportunity to expand Keurig's brewers to Europe, where it doesn't yet compete with pod-based brewers like Nestlé's Nespresso.

Euromonitor beverage analyst Virginia Lee said taking Keurig private also will let it "make adjustments to its marketing and product development strategy away from the scrutiny of the investment community."

Other aspects of JAB's strategy are less clear, such as how it plans to leverage its added scale to gain better purchasing price or any other synergies.

Mark Astrachan, an analyst at Stifel, said the deal could pose a risk to connections Keurig has within the industry such as its deal with Starbucks to make K-Cup pods. Starbucks is a direct competitor with companies that JAB owns.

The deal values Keurig at $92 a share, compared with its Friday close of $51.70. Keurig's stock had fallen 67% as of Friday from its all-time closing high of $157.10 in November 2014. The merger agreement includes a $475 million termination fee, according to a Securities and Exchange Commission filing on Tuesday.

The acquisition hurt investors who had bet on Keurig's poor performance continuing by borrowing its shares to sell short.

Among them was David Einhorn's Greenlight Capital Inc., which said in October that its Keurig position had been one of its top moneymakers this year.

Greenlight still had a small short position in Keurig as of Monday, according to a person familiar with the matter. Other investors benefited from the deal, including Ricky Sandler's $6.5 billion Eminence Capital LLC, which said a week ago that it had amassed a 7.2% stake in Keurig.

Keurigs's coffee pods and single-serve machines redefined the U.S. market, but by last year, sales were stagnating and private-label makers of coffee pods were a competitive threat. Keurig's revenue in the fiscal year that ended Sept. 26 fell 4% to $4.52 billion, while profit slid 16% to $498 million.

Chief Executive Brian Kelley, a former Coke executive, bet on a new brewing system called Keurig 2.0 launched last year that brews different-sized pots and specialty drinks. Sales of the new machines have disappointed, Keurig has said.

Mr. Kelley also pushed the development of a machine, dubbed Kold, that makes carbonated beverages in the kitchen and competes with SodaStream International Ltd. That enticed Coke to build a 17.4% stake in Keurig, and on Kold's launch in late September began selling pods for the machine from Coke brands.

Coke said it paid roughly $91 a share for its Keurig investment. The acquisition by JAB would enable Coke to reap a $25 million gain.

Cashing out gives Coke more funds to make other acquisitions or return cash to shareholders. But it also represents an unwinding of one of Coke's biggest bets in recent years. Coke Chief Executive Muhtar Kent called the Kold machine, a "real game-changing" innovation when Coke announced its 10-year Keurig partnership in February 2014.

Since then, many analysts have cooled on Kold, saying it is too bulky and expensive. Brian Holland, an analyst at Consumer Edge Research, said Keurig let expectations get too high for Kold. Building up that business is going to take years, "and the investor scrutiny that this company faces was going to make it difficult for them to keep their eye on that long-term strategy."

Mr. Kent said Monday that Coke will continue its collaboration with JAB on single-serve, pod-based machines like Kold.

Mike Esterl, Anne Steele and Juliet Chung contributed to this article.

Write to Annie Gasparro at annie.gasparro@wsj.com

(END) Dow Jones Newswires

December 08, 2015 07:19 ET (12:19 GMT)

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