Keurig Green Mountain Inc Wins a Sky High Buyout Premium

Why would a consumer products conglomerate buy a poor performer at a mind-blowing premium?

Motley Fool Staff
Motley Fool Staff
Dec 9, 2015 at 1:19PM
Consumer Goods

After an outstanding 2014, Keurig Green Mountain(UNKNOWN:GMCR.DL)shares reversed course this year. Their decline kicked off during the previous holiday season when millions of its brewers were recalled after malfunctioning machines sprayed boiling water on users.

But with a few weeks left in the year, the company is finishing out 2015 with a record-breaking buyout premium from JAB Holding Company. The stock, which closed last Friday at about $51 per share, was acquired at $92 per share, all the more impressive given its poor performance this year.

In this video, Chris Hill and Taylor Muckerman explain how the company is probably looking to profit from this deal as well as the biggest winners and losers.

A full transcript follows the video.

This podcast was recorded on Dec. 7, 2015.

Chris Hill: Keurig Green Mountain is being taken private by JAB Holding Company, which is a consumer products conglomerate based in Luxembourg. And I don't know about you, Taylor, but ... as surprising as it was seeing someone taking Keurig Green Mountain private -- because, keep in mind, Coca-Cola's (NYSE:KO) got a 17% stake in this company -- even more surprising was the buyout price. This is a stock that closed on Friday at $51 a share. And the buyout price from JAB Holding Company is $92! What?! Why are they bidding that much?

Taylor Muckerman: It's a really good question, because this stock has been the butt of a bunch of jokes over the past few years. It's not performed well. Even with this 80% premium, Coca-Cola shares are still down around 20% since they made that 16% or 17% acquisition last May, I think it was. So, shares haven't been doing all that great.

But looking at what JAB has been doing over the past year or so, they've really been trying to compete with Nestle for the in-home coffee market. Nestle has the global Nespresso machine that a lot of people have on their counter. So, you have the little pods. Direct competition. They also own some small coffee roasters: Stumptown and Intelligentsia. I've heard of Stumptown, but apparently, those are for like coffee aficionados, the high-priced coffee beans. But then, they own some stakes in Einstein Bagels and Caribou Coffee, and fully own Pete's Coffee.

So, I think they're trying to come at Nestle here, and maybe it's a bit of a rivalry, that helps spike that premium, because I can't remember a premium of 80% for a company struggling this badly on a buyout.

Hill: It really is surprising. And I'm wondering if they looked at some of the M&A activity we've seen in 2015. I'm thinking primarily of the beer merger, where Anheuser-Busch made, what was it, four runs at SABMiller? Before they finally came to an agreement. And maybe they just thought, "You know what? It's worth it for us to come in with a godfather offer, just to make sure that not only Keurig Mountain is on board, but Coca-Cola, with their 17% stake, says automatically, yes, OK, we'll agree to this."

Muckerman: That's a good point, because what if Coca-Cola just decided, "You know what, we can do this ourselves, why don't we just pay a 40% premium?" I don't think they would have done that. Clearly, they weren't willing to pay 80%, they were just willing to take the 80% bump in shares and run.

But they did say that they're gonna be working with JAB Holding going forward, because they still believe in the Keurig platform, and what Green Mountain coffee roasters have been doing. So, I think maybe with the combined brainpower of this coffee specialist with Coca-Cola, maybe you see this private deal drive more value for Coca-Cola than they originally might have expected back in May of 2014.

Hill: It's a pretty surprising -- and by that, I mean surprisingly bad year -- that we've seen. You look over the last 12 months, December 2014, the big thing Keurig Green Mountain was dealing with was the recall of their 2.0 machine, because they had a bunch of incidents where it was spraying people with --

Muckerman: Dangerously hot water, yeah.

Hill: -- and maybe that's why we saw a big short of this. By the way, this is a great example of one of the main reasons that I have no interest in shorting stocks, because this is a company that had a big short interest, and there was no real indication that anyone was on the hunt to buy this company.

Muckerman: I certainly hadn't heard anything.

Hill: And if you're someone who's in the business of shorting stocks, and you look at Keurig Green Mountain, and think, "Oh yeah, I think this thing's gonna fall even further," you're taking a bath today.

Muckerman: Yeah, I saw in Capital IQ, I don't know if it was updated this morning or if it was from Friday's numbers, but at 10:30 this morning, Capital IQ said about 10% of shares were sold short. And right now, they're selling to cover, but that's not why the stock's up. The stock is up because of the premium. So, the selling might even drive it beyond the premium, because they really have to get out of this, especially if there's margin involved.