The acquisition announcement of Keurig Green Mountain (GMCR.DL) surprised a lot of investors last week.
As the dust settles, many Keurig shareholders are feeling relief, thanks to the hefty 78% premium JAB paid for the shares. The same goes for Keurig investors such as Coca-Cola (KO 0.15%), which partnered with the company on the Keurig Kold system and should continue to benefit from the collaboration.
However, as you will discover below, this deal was hardly a sunshine-and-rainbows experience for at least one famous investor.
A full transcript follows the video.
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This podcast was recorded on Dec. 8, 2015.
Sean O'Reilly: Who are the winners and the losers from this deal?
Vincent Shen: Sure.
O'Reilly: Besides the shareholders that are obviously a winner.
Shen: So we talked a little bit about already, obviously for JAB, what their strategic vision was for this. So excluding them, it did still have a pretty surprising effect. So going back to who we mentioned earlier. We have Coca-Cola, right? So Coca-Cola made a series of two investments where they're buying up a stake and partnering with Keurig on the Keurig Kold -- which, that happens to serve very famous, you can make Coca-Cola with it right at home. That was what they thought would be a big selling point for the system. And Coca-Cola had amassed, I think, a 16%, 17% stake in Keurig.
O'Reilly: Yeah. They had paid $1.25 billion for 10% and then that started that huge run-up. And then they paid way more, like, a way higher price for the other 6%, 7%.
Shen: Yes.
O'Reilly: And their dollar-cost averaging is about, I think, 90 bucks, and they're making $2 a share.
Shen: That's what I calculated out as well. So they own almost 26 million shares, which is really funny when you think about it, like, this way. On Friday, they were worth $1.34 billion. On Monday they were worth $2.38 billion ...
O'Reilly: Unbelievable.
Shen: ... due to that trading activity. So their cost basis, around $90, $91. They went from being underwater almost $1 billion to now being very slightly right, about $26 million in the black on this investment. And the thing is, Coca-Cola CEO Muhtar Kent has mentioned that they'll look forward to continue collaborating with JAB, I'm sure, on the Kold and other technology, devices, and offerings. So it just seems like an even bigger opportunity now potentially for Coca-Cola where it's like, OK, let's leverage this, not just in the U.S.
O'Reilly: Cool. So I almost wonder if Coca-Cola will get cast to the wayside or something. Because JAB clearly doesn't care about soda. And the Kold hasn't gotten the greatest reception. But, oh, well.
Shen: I think part of their view just might be a little bit longer term in that, OK, the Kold came out not that long ago, a couple of months ago. It'll take some time to, one, get those efficiencies to bring the price down, honestly, to a more reasonable point, because before it was offered at $300. A lot of people were kind of scoffing at that initial price. But that will come down. The pod prices will honestly likely come down as well, to a point where it sustains a better user base, like that 20 million that they currently have for the hot brewers.
And other than Coca-Cola, some other investors that got quite a bit of surprise for some of the short-sellers. So interestingly enough for Keurig, their short interest increased from 5.7 million shares at the beginning of 2015 to between 15 and 16 million shares ...
O'Reilly: Oh, man.
Shen: ... in October and November. So that represents about 10% of Keurig's total shares outstanding, when for the S&P 500 overall, the median short interest or something that would be considered high is around 2%. So the fact that it was at 10% just shows you how bearish some the activity, the trading activity, had become.
And in particular, David Einhorn at Greenlight Capital was one of the more well-known vocal investors shorting this company. He had a position in 2011 that he closed out in 2014, and he basically said, "All right, well, that was a pretty unsuccessful shorting experiment on our part." And then he doubled down this year and the price collapsed this year, that we talked about -- it's down 60% year to date -- did really well for him. I think it was, like, his third best play in his portfolio, only to have this happen. So he's still making money on the deal. I think his, he ...
O'Reilly: Shorted like $120, $130, yeah.
Shen: ... it was like a $100, $102, something like that. But he just lost a huge, huge gain.
O'Reilly: This just speaks to how hard it is to short. Because technically, those people weren't wrong. Keurig was not doing well.
Shen: Well, really, twice he kind of had the right idea, but he couldn't live out, he basically couldn't survive through the position long enough to gain. And there was a previous dip before this current one in those shares. But he just got very unlucky with the boost now.
