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JAB buys Keurig

The global coffee play behind JAB’s purchase of Keurig

Keurig Green Mountain, which manufactures coffee makers and instant flavour pods, aka ‘The Nespresso of the US’, has agreed to be purchased for $13.9 billion by an investment group led by German private-equity firm JAB Holding Co. The purchase is being seen as part of JAB’s strategy to rival Nestlé as the world’s biggest coffee player.

The deal marks a nearly 78% premium over last Friday’s closing price for Keurig shares. The stock rose 72% to close Monday at $88.89.

The move comes amid slumping sales of the pods and brewers that Keurig made popular. The company has been cutting costs, including slashing 5% of its workforce in August, and introducing products to offset the downturn in its core offerings.

The deal suggests that the paths of Keurig and JAB’s other properties — including Jacobs Douwe Egberts, Peet’s Coffee & Tea and Caribou Coffee — may intersect as JAB seeks to reverse Keurig’s fortunes. JAB said it would operate Keurig as an independent, private subsidiary based in Waterbury, Vt.

Keurig adds grist to JAB’s coffee mill

Bart Becht, chairman of JAB Holding, the billionaire Reimann family’s investment group, knows what he likes. “We like coffee,” he said two years ago, reports the Financial Times. “More and more people are drinking coffee, particularly in emerging markets.”

JAB’s $13.9bn acquisition of Keurig Green Mountain in the US with a number of other investors is its third big deal in as many years. JAB has swallowed up almost $30bn of large and small coffee businesses, including Keurig, making it the main challenger to Nestlé.

The US deal comes after JAB’s consolidation efforts in Europe, where it started with the 2013 purchase of DE Master Blenders. A year later, it merged the Netherlands-based group with the coffee assets of Mondelez to form Jacobs Douwe Egberts.

The latest purchase, along with the acquisitions of smaller brands, Peet’s Coffee & Tea and Caribou, would boost JAB’s share of the global coffee market from 16 per cent to 20 per cent, according to Euromonitor. The transaction still has to clear regulatory hurdles.

Given that Nestlé’s 22 per cent share has remained largely unchanged over the past five years, it is clear that the battle for coffee drinkers is hotting up, especially in Nestlé’s lucrative Nespresso capsule market, endorsed by the American actor George Clooney.

It is this capsule or pod market where Keurig adds to JAB’s blend of coffee holdings. Keurig and its K-Cup machines are regarded as the “Nespresso” of the US.

The coffee pods market is worth $13bn, according to Euromonitor. Keurig is market leader in the US, while Nestlé’s main terrain is Europe.

Yet it is in emerging markets where their battle is likely to play out. Demand for expensive pod machines may still be nascent but emerging markets offer significant growth potential, especially in Latin America and Asia.

One consumer sector adviser who has contacts with JAB, says: “They want the whole spectrum in coffee. They want to be bigger and better than Nestlé.”

Coffee is one of Nestlé’s most profitable businesses. The coffee market itself is attractive because it has proved resilient in the economic downturn with per capita consumption continuing to rise.

As in many other food and drink sectors, it is the premium — or speciality coffee — market that offers the biggest profit margins, rather than instant coffee, a business which has become increasingly commoditised, with sales driven by price rather than brand.

Speciality coffee is the fastest-growing coffee segment, especially in the mature markets of the US and Europe. In the US, it accounts for 50 per cent of the market, up from 40 per cent five years ago, according to the National Coffee Association.

Nestlé is dominant in instant coffee. But its sales strategy is to encourage consumers to spend more money on brands such as Nespresso, with its coffee pods and machines. Nespresso’s operating profit margin is estimated by analysts to be near 30 per cent, though these have come under pressure especially as sales growth has slowed.

François-Xavier Roger, Nestlé finance director, said in October that the group was “really driving the premium portion coffee segment through quality, innovation, and direct consumer access”. Nespresso is sold direct over the internet or through a growing number of dedicated branded outlets.

Nestlé would not comment on JAB’s latest deal but last year, Paul Bulcke, chief executive, acknowledged that competition in coffee was getting “tougher”.

Keurig has struggled recently, however. It has had problems, including with the compatibility of pods and its new generation machines. Weaker than expected trading contributed to a profits warning in August. Before the JAB deal was announced its shares had fallen more than 60 per cent down since the start of the year, making it vulnerable to the JAB-led takeover, analysts say.

The question now is how JAB will develop its coffee business and brands.

Akeel Sachak, global head of consumer at Rothschild bank says: “JAB now clearly has critical mass in coffee but its collection of assets doesn’t yet have a unifying global brand like Nestlé’s Nespresso.”

Analysts at Mintel, the research group, say: “Nestlé’s Nespresso machine is comfortably the most established pod machine in Europe and commands a high margin. However, Nestlé is under increasing competition and now has to cope with a genuine rival.”

Source: FT and USAToday

Related reading:

Keurig Added to Coffee Empire of European Investor Group

A billionaire European family is on a caffeine-fueled binge to roll up the global coffee industry, with a huge bet announced Monday: a $13.9 billion acquisition of Keurig Green Mountain.

The all-cash deal, offering an eye-popping premium of 78 percent, took analysts and investors by surprise. Keurig has lately had its share of challenges, facing a saturated market for its single-serving coffee brewers, sluggish sales of pods and a stalled new product.

But the JAB Holding Company — the investment arm of the Reimann family, heirs to the German consumer goods company, Joh A Benckiser — is in year three of its quest to dominate the global coffee industry. Keurig, which commands a large majority of the single-serve market in the United States, was a natural next step for the Reimanns…..

NYTimes: Read the full article

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