GMCR just made life miserable for PEET.
After a competiting bid from Green Maintain Coffee (GMCR), Peet’s Coffee & Tea (PEET) was forced to raise its offer to buy Diedrich Coffee by 24% to approximately $265 million. Peet’s increased its bid to $32 a share from $26.
Green Mountain is offering $30 a share in cash. Green Mountain has been consolidating its K-Cup licenses as it bought Tully’s Coffee in March and announced the acquisition of Timothy’s Coffees earlier this month.
In some respects, PEET management’s talking up the DDRX deal exposed a weakness in PEET’s long-term business model, although the company will be fine without it. To justify the egregious purchase price (94% or $249 million is goodwill), management needed to signal how important the single-serve coffee market is. When discussing the just announced DDRX deal on a conference call, senior management commented that “you've got to take a look at this single cup household penetration growth and what's happening, it's a very fast growing segment. It's here to stay and it's going to be a significant consumer segment and this isn't going to take five years. This is happening now.”
There is no denying that the recent growth in the single-serve segment is astonishing. Green Mountain’s Keurig brand holds 85% share of single cup brewer sales, with sales doubling over the last two years. In 2010, Keurig brewers will approach penetrating over 4 million homes. With approximately 90 million households with coffee brewers, Keurig’s share remains less than 5%, but it is growing rapidly. The increasing share base of installed Keurig brewers is the primary driver of K-Cup growth. And, Peet’s management has now communicated the need to play in this game!
The acquisition of Tully’s last March gave GMCR a brand with manufacturing capabilities in the western part of the United States – PEET’s core market. Without the ability to compete in the single-serve segment, PEET is facing the potential for significantly slower top-line sales trends as its market share erodes over time.
PEET now sits out there exposed; damned if they do, damned if they don’t. If they do buy DDRX, the fact that the valuation of DDRX is so over the top is a big negative for PEET and we will not know if the acquisition has proven successful until 2011 (when it is expected to be accretive). On the other hand, if they don’t buy it now, how is management going to explain away the urgent need to get into the single-serve segment.
Clearly, the growth in the home brewer single-serve segment has benefitted from more people being unemployed and staying at home for their morning coffee. That being said, it is not surprising that MCD and other QSR operators are talking about how challenging the breakfast day part is. For PEET, as I said before, the DDRX acquisition is not expected to be accretive until fiscal 2011. What is the likelihood the economy recovers and the U.S. economy starts producing jobs again in 2010? If you think it is likely, then the timing of this purchase at such a high premium is all wrong. As more people go back to work, more and more Keurig brewers will be sitting unused at home and K-cup sales will slow right when PEET needs them most!