Mondelez Is Making Waves in the Global Coffee Market

Mondelez and Coca-Cola are each working to dethrone Nestle, but can they succeed?

May 27, 2014 at 3:54PM

Mondelez International (NASDAQ:MDLZ) has been trying to focus on its core snacks business and cutting costs. In its efforts to focus on the core snacks business, Mondelez recently announced that it will combine its coffee business with D.E. Master Blenders. The new combined company will be called Jacobs Douwe Egberts. On the completion of the transaction, Mondelez will become a more focused snacking entity that will generate 85% of its revenue from snacks, up from 75%.

Unlocking value
In recent years, Mondelez has been working to expand its margins and create value for its shareholders. The removal of its coffee business is another step taken by the company to unlock value and create wealth for shareholders. The combination of Mondelez and D.E. Master's coffee business will create a coffee powerhouse that will address competition within the industry and provide growth. On the completion of the deal, which is expected to close in 2015, Mondelez will get $5 billion in cash and a 49% stake in the new combined company.

Mondelez is likely to benefit from the deal because it will be able to focus on its core snacks business while owning an equity stake in the new company, which will be managed by an experienced management team solely focused on the coffee business. Also, Mondelez will use the $5 billion in cash proceeds to buy back shares and repay a portion of its outstanding debt.

Share buybacks and the repayment of debt will have a positive impact on the company's future earnings per share because it will have fewer shares outstanding and reduced interest costs. Also, the deal will help Mondelez lower its operational costs because both companies will be combining their distribution and marketing strengths as well as sharing technology that will enhance productivity.

Competitive environment
Competition within the $81 billion global coffee market seems to be heating up. Mondelez and D.E. Master are currently the world's No. 2 and No. 3 players with global market shares of 12.9% and 5.9%, respectively. The new combined company will control about 17% of global coffee sales. Also, the transaction will create challenges for global coffee leader Nestle S.A. (NASDAQOTH:NSRGY), which currently controls 23% of the global coffee market.

The growth prospects of the global coffee market remain attractive and continue to offer opportunities for coffee companies to expand their top-line numbers. The global coffee market has grown to $81 billion in 2013, and it has grown more than a third larger in the last five years. Also, Euromonitor International has projected that global coffee sales will exceed $100 billion by 2018. Mondelez's coffee deal will pose a challenge to Nestle at a time when the latter is already facing difficulties.

 In the last decade, Nestle's coffee business segment enjoyed revenue and margin growth; however, in the last couple of years the segment has been showing signs of a slowdown. Nestle's powdered and liquid beverages unit's top-line growth has dropped to 4.6% in 2013 in comparison to 8.9% in 2012 and 13% in 2011.

The focus of the new combined company covers two areas of the coffee market, capsule and instant coffee. Also, the new company will have greater resources for research & development and marketing, which will pose challenges to other players in the industry.

Another bet
Recently, The Coca-Cola Company announced that it will increase its stake from 10% to 16% in Keurig Green Mountain, a coffee-brewer specialist. Earlier this year, Coca-Cola bought a 10% stake in Green Mountain for $1.25 billion as part of its efforts to introduce a single-serve drinks system. Coca-Cola has been making these investments to keep up with changing consumer tastes and preferences.

Green Mountain is likely to benefit from the deal because it will be able to use the strong consumer base and supply chain of Coca-Cola to expand its international presence, especially in the ready-to-drink coffee and tea segments which remain very popular in Asia-Pacific and North America. Competition in the global coffee market has been increasing as large companies have set themselves up well to take advantage of the available growth potential.

Final take
Mondelez's announcement that it will curve out its coffee business will help create value for shareholders and also allow it to focus more on its core snacks business and expand its margins. Also, the new combined company will be better positioned to tap available growth potential and address competition in the global coffee market.

The combination of Mondelez's coffee operations with D.E. Master and Coca-Cola's stake in Green Mountain indicate the growing importance of the global coffee market. Mondelez and Coca-Cola are likely to benefit from recent deals, while Nestle's position as a market leader will likely be challenged. 

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Furqan Asad Suhail has no position in any stocks mentioned. The Motley Fool recommends Coca-Cola and Keurig Green Mountain. The Motley Fool has the following options: long January 2016 $37 calls on Coca-Cola and short January 2016 $37 puts on Coca-Cola. 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 disclosure policy.

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