Many investors were caught by surprise when the news broke that European investment firm, JAB Holding Co., would be acquiring Keurig Green Mountain(UNKNOWN:GMCR.DL)and taking the company private. There was even more shock in store when it came to light how much JAB paid for the coffee company.
Keurig shares hit their all-time high in November 2014 and have steadily declined since then with the stock down 61% year-to-date before the acquisition news hit the wire. However, that didn't stop JAB from coughing up a rich $92 per share -- a nearly 80% premium to the last trade price -- for its asset-to-be. In this video segment, Motley Fool analysts Vincent Shen and Sean O'Reilly break down the key numbers behind this intriguing deal.
A full transcript follows the video.
This podcast was recorded on Dec. 8, 2015.
Sean O'Reilly: So, Vince, Monday morning I got a push notification from my Wall Street Journal app on my phone, and my jaw quickly hit the floor. Keurig Green Mountain had been bought out for $92 a share. Almost 100% premium. It was, like, $70-something because it was at 50 bucks before. Anybody see this coming?
Vincent Shen: Yeah. A lot of people who were short the stock did not see it coming, I'll tell you that.
O'Reilly: Game over.
Shen: The thing is, I kind of wanted to approach this in three kind of steps. So first we can talk about some of the terms of the deal, the valuations based on the offer price that you mentioned, which was quite a premium. And we'll get to that as well. Then I want to talk about, a little bit about the buyer, their strategic rationale, what this will mean for Keurig. And then I want to talk about some of the winners and losers -- other winners and losers from this deal.
O'Reilly: Awesome. So first and foremost, I already mentioned the price, but let's just say it again and then how much higher, everything.
Shen: Sure. So just keep in mind on Friday, Dec. 4, Keurig shares closed at $51.70. And on Monday after the news, they closed at $88.89, which was up 72%.
O'Reilly: So there's a little bit of an arbitrage spread there, but --
Shen: So the actual buyout price of $92 meant it actually comes out to about a 78% premium to that closing price. And it actually gets even higher with data from Bloomberg, where they basically said, "This buyout represents the largest premium in history for the beverage industry for deals larger than $5 billion," when you compare the purchase price with the 20-day average price.
And because that 20-day, when you use that 20-day average, it actually comes out to almost a 90% premium or something insane like that, in terms of, the stock already was getting battered this year -- year to date is down 61%.
O'Reilly: Well I was about to say, wasn't its 52-week high, like, $145-something?
Shen: Oh, yeah, actually it hit its high last November at $150, over $150. So it has traded down. It's lost two-thirds of its value since then, only to get this nice windfall.
O'Reilly: It almost seems like that's the reason that the buyer JAB had to pay up to $92. Because anything less than that, there would've been shareholder lawsuits and all kinds of stuff thrown at the company.
Shen: That's true, but the thing is, at the $51.70 from the Friday closing price, it was trading about 16.6 times trailing-12-month earnings. And then when you look at the offered purchase price of $92, you're looking at about 29.5 times. Now, based on recent results, Keurig's fiscal year actually ended at pretty much September, and for the fiscal fourth quarter, revenue down 13%, earnings down 15% year over year; for the fiscal third quarter, revenue down 5%, earnings down 24%. And then they were either flat or down slightly for the two quarters before that, too.
So that obvious downturn resulted in some of the weak trading. But paying 29.5 times for that, for what you're seeing is trending down into basically an unsuccessful Keurig 2.0 rollout when they did not allow third-party pods. And people went up in arms about that. Then you also have the pretty lukewarm reception to the Keurig Kold, and I think again this was a very nice turn of events for people who probably were otherwise in the red for their Keurig position.