Will Peet's Come Back to Haunt Starbucks?

Compared to Starbucks  (Nasdaq: SBUX  ) , Peet's Coffee & Tea  (Nasdaq: PEET  ) is tiny, like an espresso placed next to a grande latte. But also just like an espresso, Peet's packs a lot of power into that small size: the people who drink Peet's products, few in number as they are, can be almost cult-like about the company. They don't like to drink coffee from anyone else.

Two days ago, Peet's announced it was being taken private by Joh. A. Benckiser, a German holding company. The buyout cost JAB about $1 billion -- that's $73.50 a share, a 29% premium over last Friday's closing price. For a premium of that size, JAB must see something big it can do with the brand beyond what it is now.

Maybe that something big is to try and grow Peet's rabid customer base to the point where it can challenge Starbucks worldwide.

An offer they can't refuse
In a statement about the deal, JAB chairman Bart Brecht said, "At JAB, we are committed to owning and investing in companies with strong, premier-quality brands, and great people whose values we share. Peet's is just such a company, and we look forward to preserving the company's culture and core values while supporting management's vision for future growth." At least so far as the buyout itself is concerned, JAB seems to be sticking to that take-the-high-road story. Peet's will continue to be run and operated by the current management team and employees, and will even stay based in its current offices in the San Francisco Bay area.

The deal will also keep the company's Almeda, Calif. roast-to-order plant operating. And while it's all subject to shareholder approval, at a 29% premium, it's hard to imagine why they would say no.

Striking while the coffee's hot
Starbucks is big. In the last 12 months, the company generated $12.6 billion in revenue and $6.75 billion in gross profit. In the same time period, Peet's generated $378.2 million in revenue and $185.5 million in gross profit. And while Starbucks has grown its revenue by 14.7% year over year and its earnings by 18.5%, Peet's grew its revenue 7.1% in the most recent quarter, but suffered a loss in earnings of 38.6%.

That earnings drop? There's the rub. After Peet's missed earnings by so much in the first quarter, its stock kept dropping until it ended up below $55, very near a record low for the last 12 months. That was July 12. JAB made its offer only eight days later, when Peet's share price had climbed ever so slightly out of the basement, to $57.16.

With coffee prices on the rise until very recently, Peet's profits had been suffering at the hands of the commodities market. All told, this was the right time for JAB to strike.

Dry your eyes, Howard. All shall be well
But why strike at all? Firstly, JAB is an old hand at consumer-goods companies. It currently owns the luxury-goods company Labelux, which operates the labels Jimmy Choo and Bally, and has a majority stake in Coty, a worldwide beauty business.

Secondly, coffee retailing is big worldwide business with generally good margins. McDonald's (NYSE: MCD  ) now makes more money off each dollar of coffee sold than its popular hamburgers. And then there's the single-cup serving market -- Green Mountain Coffee Roasters' (Nasdaq: GMCR  ) patents on its very popular Keurig single-serve machines won't last forever.

Did Starbucks miss out by not getting hold of Peet's while it could? Yes. It's a powerful brand, one ripe for development. And while the price was high, it was high for good reason. Does Starbucks feel any regret over the JAB deal? If it does, it's not talking about it. And we don't know if the company even made any formal overtures to Peet's. But with $2.23 billion in cash on the balance sheet, Starbucks would have been in a position to do a deal if it wanted to.

But that's all spilled coffee at this point, and if you're crying over it, Howard, there's no use. Starbucks is one of the most powerful brands in the world, and has all the staying power it needs, at least until we hear from the new Peet's Coffee & Tea. If the notion of powerful worldwide brands is whirling through your caffeine-powered brain, check out three stocks The Motley Fool says are going to take over the world in this special free report: "3 American Companies Set to Dominate the World." Download your copy while it's still available by simply clicking here now.

Fool contributor John Grgurich owns several chipped Starbucks mugs, but no shares of any of the companies mentioned in this column. Follow John's dispatches from the dangerous front lines of capitalism on Twitter @TMFGrgurich.

The Motley Fool owns shares of Green Mountain Coffee Roasters, McDonald's, and Starbucks. Motley Fool newsletter services have recommended buying shares of Starbucks, McDonald's, and Green Mountain Coffee Roasters. Motley Fool newsletter services have also recommended writing covered calls on Starbucks and creating a lurking gator position in Green Mountain Coffee Roasters.

Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a strangely moving disclosure policy.


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