Back in March, Diedrich Coffee (Nasdaq: DDRX ) couldn't give away its stock at $0.21 a share. Now, Peet's Coffee (Nasdaq: PEET ) and Green Mountain Coffee Roasters (Nasdaq: GMCR ) are willing to pay more than 150 times as much for Diedrich, and that still may not be enough.
The bidding war began three weeks ago, when Peet's announced that it will buy Diedrich for $26 a share. Diedrich's fortunes have turned around this year on the strength of its K-Cup portion packs for Green Mountain's Keurig coffee makers.
This new relationship seemed like a sure thing until Monday, when Green Mountain proposed a $30-per-share buyout offer. Peet's immediately countered with a $32 bid, which Green Mountain matched yesterday.
Green Mountain argues that it's offering the superior deal because it's willing to dig into its deep pockets for an all-cash deal. There will be no financing to line up or due-diligence contingencies to sift through, since Green Mountain is clearly well versed in the power of Diedrich's Coffee People, Norma Jean's, and K-Cups. Peet's is offering a cash and stock deal.
You know how this ends, don't you? Peet's shares initially rallied after the original $26 offer, but they're sinking whenever Peet's raises the ante. So the shares' decline dilutes the value of Peet's offer.
When shares of Peet's closed at $38 over the weekend, its offer of 0.321 shares of Peet's and $19.80 in cash for every Diedrich share outstanding added up to $32. Two brutal trading days later, Peet's stock is down to $32.86, enough to erode the price of the deal to $30.35.
Peet's shareholders have had enough, and we all know what will happen if Peet's comes back with higher exchange ratios. It's going to have to come back with an all-cash deal, and that's still not going to appease investors who soured quickly once this romantic date turned into an awkward party of three.
What I want to know is what Green Mountain is doing here in the first place. It should be delighted that Peet's wants some skin in the K-Cup game. Other java heavies moving K-Cups would probably prefer that Green Mountain doesn't have a vested interest in the success of some players. Green Mountain doesn't need to be on bended knee before Diedrich or Timothy's Coffees of the World or anyone else at this point.
If Starbucks (Nasdaq: SBUX ) falters in its instant-coffee initiatives or tires of its deal to provide T-discs for Kraft's (NYSE: KFT ) less popular Tassimo, would Green Mountain get in the way if it wants to make K-Cups and pay royalties?
These are good times for Green Mountain. Given Wal-Mart Stores' (NYSE: WMT ) distribution and deals with Jarden's (NYSE: JAH ) Mr. Coffee and Conair's Cuisinart to begin rolling out new coffee makers that require K-Cup refills, it doesn't need to crash Peet's party.
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