JAB Holding and Amazon Make Headlines With Their Latest Acquisitions

Chris Hill: It's Wednesday, April 5th. Welcome to Market Foolery. I'm Chris Hill. Joining me in studio: David Kretzmann from Supernova. He's back from his trip. Welcome back, sir!

David Kretzmann: I made it back in one piece. It's good to be back.

Hill: I had no doubt you would make it back in one piece.

Kretzmann: I appreciate that.

Hill: I want to get to your trip in a moment, because you spent some quality time down under, exploring Australia and New Zealand. But we have to talk about the story of the day.

Kretzmann: The news fairy.

Hill: The news fairy has been good, I'll be honest, coming into this week, I was like, I really hope the news fairy shows up, because there's not a lot of earnings news this week. The deal that we discussed yesterday has now been ... well, it hasn't been set in stone. I guess all the documents will be signed in the next couple of months. Panera Bread is being bought, and we now know it's going to be bought by JAB Holdings. It's a $7.5 billion deal. If you're a Panera Bread shareholder, you're having one hell of a good week. A week ago, the stock was trading around $250, and the buyout price is going to be $315 a share. What did you think when you saw this news? JAB Holdings, you look at their portfolio, the companies that they own, they are very deep into the food space. They have Krispy Kreme donuts, Green Mountain Coffee, Peet's Coffee, Caribou.

Kretzmann: They love their coffee.

Hill: They do.

Kretzmann: It definitely makes a lot more sense than Domino's acquiring Panera. Panera seems like a much better fit. And, based on what Ron Shaich, the founder and CEO of Panera, has been saying, it sounds like JAB will be giving Panera a lot of autonomy. To me, that would be the only way a deal like this would make sense. You get the impression that Shaich and company really love what they do, and the Panera 2.0 concept is really clicking. So, I would expect JAB to be a little bit more hands off with Panera compared to Krispy Kreme or Keurig, which were brands or companies that were struggling a little bit more. Keurig had Keurig Kold, that was the big deal that totally fell flat on its face around the time when JAB bought them out. Panera seems like it's a good fit, based on where JAB has been going. Like I said, probably a little bit more hands off. I think it makes sense, and for Ron Shaich and company, they can be fully in control, from the sound of it. So, it sounds like a good deal for both.

Hill: It does. The one thing -- and you and and Aaron Bush and I were talking about this earlier this morning -- that's a little puzzling to me is, if you think about Krispy Kreme, Keurig Green Mountain, Peet's, Caribou, when they were all public companies on their own, by the time JAB got around to buying them, they had struggled, as you said. And it was one of those situations where I remember thinking, particularly in the case of Keurig Green Mountain, "Well, that's good. That's good, that they're going the private-equity route, because then they can be out of the spotlight." Panera Bread is crushing it. So, that's the only thing that's a little bit puzzling to me. But, as Aaron Bush said, maybe JAB just wanted something a little easier that they didn't have to go in and fix.

Kretzmann: Yeah, they don't have to fiddle with it quite as much. And it sounds like that's what JAB wants, that's what Panera wants. So, it makes sense there. A few years ago, there was a much different conversation around Panera. Even here at the Fool, we had a good amount of people here who were skeptical about where Panera was going. It was struggling on a lot of different fronts. And it wasn't immediately clear whether Panera 2.0 would click. But it turns out Panera was one of the first restaurant chains to embrace digital, mobile, online ordering. And as a result, at a time when a lot of restaurants are struggling, Panera today is putting out astounding numbers, it's well at the top of the pack, alongside companies like Domino's and others. A few years ago, it wasn't as obvious that Panera would turn into what it has today. The company, even over the past five years, still, after this pop, the stock has still underperformed the S&P 500. I know we have some people at the Fool who follow the company and recommended it a lot longer. If you've held the stock for 8 to 10 years, you've come out well ahead. It's up 300% to 400%. But over the past few years, the company has still struggled. And it's only really within the last 12 to 18 months that it became clear that 2.0 was going somewhere. I think, in the grand scheme of things, it still could be somewhat early. But like we were talking about, JAB, at this point, you just let Panera and Shaich do what they're doing, because it's clearly working. And in the restaurant space, not a lot of restaurants can say that.

Hill: Right. I watched an interview that Shaich gave this morning, and one of the things he was talking about was, you go back three years when he made the famous mosh pit comment, and he was absolutely right about that. But one of the things he talked about in this interview was how long it takes. It's not just a matter of "you need an app" and make it easy for people to order. No. You have to make sure that there are people in the kitchen who are going to be able to deliver on what is being ordered. The stat that surprised me a little bit when he said it, but I suppose it makes perfect sense, when it comes to mobile ordering at Panera Bread, 70% of those orders are customized. So, it's not just someone saying, "I want a bowl of chicken soup," or "I want this sandwich." It's "I want this sandwich, I want it on this type of bread, I don't want the mayonnaise, I do want spicy mustard." All that sort of thing. They really put so much ... it's all the more impressive what they have done. It's also, if you are, for example, a Starbucks shareholder, where one of the recent stories about their business is, they're struggling a little bit with the mobile ordering front, you realize, "Oh, yeah, there's a lot more that goes into it. It's not something that can be turned around in one or two quarters." 

Kretzmann: No, certainly not. I think another company that really needs to take notes from Panera and Starbucks is Chipotle. Chipotle actually took the Chief Information Officer, Curt Garner, from Starbucks about a year-and-a-half ago. Even at Chipotle, it's like going through molasses there, it's just so slow to improve the app. I love Chipotle, I'm one of their regular users, but their mobile and online ordering experience, compared to Panera and Starbucks, is just way behind. This stuff does take time. I think it just reiterates or reinforces the importance that as investors, you have to be patient. No company is going to go up in a straight line. Companies like Panera or Starbucks will go through these stumbles, but if you believe in the leadership, the long-term advantage of a company, it pays to stick it out. Even though Panera had a few years where it struggled, by and large patient investors are coming out ahead. So, I think it's critical to be patient, which is easier said than done when you are investing in a company that's going through some shorter-term stumbles.

Hill: Best performing restaurant stock of the last 20 years, better than Chipotle, Starbucks, any of them. It has returned over 10,000% over a 20 year period. So, definitely a testament to long term buy and hold. 

Twitter has lost Thursday night NFL games to Amazon, and it's understandable why, because Amazon ponied up five times the amount of money for the Thursday night games that Twitter did a year ago. Amazon is paying $50 million for 10 Thursday night NFL games.

Kretzmann: Which is essentially the same deal that Twitter had last year.

Hill: Right, although they were only paying $10 million for it.

Kretzmann: Yeah, besides that.

Hill: And it's not exclusive, they'll still be on the broadcast networks. This comes at a time when Amazon shares broke through the $900 barrier and hit another all time high this week. It seems like, while Amazon is the headline here, in sports, there are games where it's like, did one team win it, or did the other team just lose it? I look at this story and I know the headline is, "Amazon has won the right to stream these games." I look at it as, "No, Twitter is the loser." That, to me, is the headline.

Kretzmann: Especially with Jack Dorsey coming on as CEO over the past year and a half. The company is focusing on being the live events platform, and this NFL deal seemed to be a pretty big piece of it. And it's not like Twitter is struggling for cash. I've been critical of the company, I'm a disappointed shareholder, like a lot of people, but they have over $2 billion in net cash. And this seems like the type of thing where you don't want to focus so much on immediate ROI here. So, I'd be curious to see, what was the max price that Twitter went up to and they said, "At this point it's not worth it." It reminds me of the Costco and American Express deal, where Charlie Munger at Berkshire Hathaway ... I guess he's vice chairman under Buffett, he basically said comments along the line of, "If you're American Express, you pay a little bit more and you keep that deal. Clearly, that's valuable to your brand and your competitive position." I think, if you're Twitter, you needed the NFL deal far more than Amazon needs it. But, I think it makes sense for Amazon. It beefs up their video platform. I'll be curious to see, because, they will have some time for ads during the game, so I'll be curious to see what that mix of ads looks like. Will they just be promoting Amazon NFL gear? Will they be promoting other Amazon products and services? Or will they open it up to outside advertisers? If I'm Amazon, I think this is a great opportunity to test promoting your own products and services. I would be surprised if that isn't a pretty big focus of theirs.

Hill: Yeah, that was one of my thoughts when I saw the price tag. I thought, "Can they sell $50 million worth of stuff on 10 consecutive Thursday night this fall?"
I think they probably can.

Kretzmann: We'll find out. And, they'll bring in more Prime memberships. It makes that Prime offering, especially the video aspect. I think more people are waking up to the fact that Amazon has some quality original shows. I just found this out today, they have a partnership with the NFL already with one of their shows where they follow an NFL team through the season. Apparently, that's one of their most popular shows. I think they feel pretty good that this will be a hit. They have that data. I think this is a golden opportunity for them to venture into that live TV market and figure out how they can integrate the Amazon experience with live TV.

Hill: Let's talk about your trip. We'll start with any business takeaways. You were gone for three weeks. One or two business opportunities that you saw, whether it's investing opportunities or a U.S. brand that's doing well in Australia. Did you meet up with the Fool Australia people?

Kretzmann: I was able to meet up with most of them. They actually had a member event on the Friday before I left, so I was able to meet up with a lot of them. I stayed with Claude Walker, who's one of our advisors over there for Hidden Gems in Australia. Big thanks to Claude and the team for meeting up. I was able to see Joe, Uncle Joe.

Hill: Nice. How is Uncle Joe?

Kretzmann: Seems like he's doing well. He's heading up a fund now. What's interesting about Australia compared to the U.S. is, The Motley Fool in Australia is a big fish in a small pond. In the U.S., when it comes to retail investors, we have more clout than probably any organization in the U.S., but we're still in a big pond. Our analysts aren't jumping on conference calls talking to management. But in Australia, it's not uncommon to go on a conference call and hear a Motley Fool advisor asking questions to management. It's a different ballgame there, to some extent. But, yeah, the team over there has done some great work.

Hill: Fantastic. In terms of what you saw, in terms of business and investing, share one or two things.

Kretzmann: One thing to me -- this is an area that I definitely want to pay more attention to now -- is the whole payments space. I didn't actually convert any cash while I was over there. There were only two instances where I needed cash. It was either, when I needed to ride the bus, in New Zealand, and they only accept cash, they wouldn't accept a credit card. Similarly, in Australia, I needed to pay cash for a shuttle to the airport. Other than those two instances, I was able to just bring my credit card. If you have a travel card, there's no foreign transaction fees. To me, it reinforced the position especially of Visa (NYSE: V) and MasterCard (NYSE: MA). They are really bringing us toward a cash-less society. I think they have an incredible position. Also, thinking more broadly about the payment space, in New Zealand in particular, I noticed a few different retail spots that had Alipay and WeChat Pay. That's Alibaba and Tencent, two of the heavyweights in China that are rolling out their mobile pay services. So, it makes me wonder what company in that whole space has the best position? Because Alipay, WeChat Pay, that's venturing closer into PayPal's territory. Then, you have online payment processors like Stripe. 

It's a whole category that, as a whole, seems to be pretty crowded, but I keep coming back to Visa and MasterCard. I think those are the toughest companies to disrupt or overtake. They have very powerful network effects at play and it shows in the financial statements. PayPal is a profitable company. They have a net profit margin of about 13% to 14%. Visa has about a 40% profit margin. Visa and MasterCard essentially have no cost of sales, so their gross margin is 96%. In the case of MasterCard, their gross profit margin is 100%. They have no cost of sales. It's just incredibly powerful and profitable companies. Their competitive position is reflected in the financial statements. That means they do have a pretty big target on their back, because if you are a company nipping at their heels, that's a pretty attractive position to be in. But I see those companies as least likely to be immediately disrupted. I want to take a closer look at those companies, for sure. A month or two ago I was watching an interview with Visa's relatively new CEO on Jim Cramer, and he was talking about the opportunity. And Cramer said, "You're a $200 billion company, but it sounds like you're just at the beginning of your opportunity." The majority of payments around the world are still in cash, so there's a huge opportunity to transition from cash to credit cards. Obviously, I would say New Zealand and Australia are probably toward the forefront as far as credit card adoption, compared to some other countries you might visit. But, that was definitely something that stuck out to me.

Hill: Nice. And I'm assuming you had a little bit of fun?

Kretzmann: Yeah, I had a lot of fun. Pretty much the whole trip, I was in the North Island in New Zealand, so I had some time to explore around there. I went to Hobbiton. You and Bill were talking about The Lord of the Rings yesterday. I'm not a huge The Lord of the Rings fan, I watched the three original movies and I watched maybe one and a half of the Hobbit movies. But people had told me, even if you're not a huge The Lord of the Rings fan, Hobbiton is a cool thing to check out. And I think it's probably the closest thing that New Zealand has to a Disneyland type of experience.

Hill: Is it a theme park? Is it a town? What is it?

Kretzmann: What it is, it's the original farm that they filmed the whole Hobbit set, this is the whole Hobbit village, so, where Bilbo and Frodo are from. Initially, when they filmed the The Lord of the Rings last decade, they essentially tore down the set. But when they returned to do The Hobbit movie, the farmer who owned that land very smartly suggested to Peter Jackson, the director, "Let's leave the set up and invite people to come here." So, it is not a cheap experience, by any means. You're paying $70 to $80 a person to get in. And they're just filling busloads by every 10 to 15 minutes. That farmer made a very smart business decision. But, it's a fun experience. You're there for a couple hours, you walk through the whole Hobbit set. It's similar to Disneyland, you're just transported to another world. And if you're a diehard The Lord of the Rings fan, it's definitely a place to go.

Hill: Thanks for being here, man!

Kretzmann: Great to be here!

Hill: I really appreciate you coming by. As always, people on the program may have interests in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. That's going to do it for this edition of Market Foolery. The show is mixed by Dan Boyd. I'm Chris Hill. Thanks for listening! We'll see you tomorrow.