Last week, it was announced that Keurig Green Mountain (NASDAQ: GMCR), the leading manufacturer of single-serve coffee pods in the U.S., would be taken private by JAB Holding Company, a European consumer goods conglomerate.

Backed by the billionaire Reimann family of Germany, JAB has quite a diverse portfolio of brands. Although most of its investments are in Europe, over the years, the Luxembourg-based company has also acquired majority stakes in U.S. brands like Peet's Coffee & Tea, Caribou Coffee, and Stumptown Coffee Roasters. But why Keurig Green Mountain and why the massive buyout premium? In this video, we discuss the history of JAB and its ambitions in the world of coffee.

A full transcript follows the video.


This podcast was recorded on Dec. 8, 2015.

Sean O'Reilly: So let's talk about a little bit about JAB Holding, the acquirer, because one, I don't think anybody's ever heard of them, two, they should have, though, because they keep buying consumer brands. And the other thing is it almost seems like this deal at this price only could make sense for these guys.

Vincent Shen: That's actually a good way to put it. And I'm kind of glad you mentioned, too, the thing about this JAB Holding company being relatively unknown. And I think that's almost by design, because this is an investment firm, first of all, that people should know.

They manage the money of the Reimann family, which is one of the wealthiest families in Germany. I think when I checked their net worth overall, it's something like $20 billion. The family's very private; they're pretty well known for two things I thought were interesting also, is that they do not get involved in the business affairs, and they also ...

O'Reilly: That's very Buffett-esque.

Shen: ... and they also, I think it was when they turn 18 or something along those lines, they have to basically sign some type of agreement where they promise to stay out of the public eye.

So overall this is a very private family. And the thing is, JAB previously has already really aggressively added to its coffee portfolio. So kind of what you're talking about in terms of the valuation, what they're willing to pay, when you look at JAB's overall strategy, it starts to make a little bit more sense why they would pay that huge premium, whereas before they had already acquired brands like Peet's Coffee & Tea, Stumptown Coffee Roasters, Intelligentsia Coffee, Caribou Coffee, even the parent of Einstein Brothers Bagels.

So they're in this process right now of where they've built themselves into the No. 2 player in terms of the world coffee, or packaged coffee market, which I think is already worth something like $80 billion.

No. 1 is, I believe, Nestle, still. But this kind of ...

O'Reilly: Particularly in Europe.

Shen: Yes, and this will narrow the gap. And you have to think about the fact that in 2013, JAB purchased, I think it was the D.E. Master Blenders, the coffee company, for $10 billon. Then last year they joined that with the coffee business of Mondelez International to create Jacobs Douwe Egberts. So they have this huge conglomerate now.

And now in addition to Keurig ... where Keurig, at least within the U.S., where it dominates, it has, like, 80%-90% market share in terms of the individual pod market and 20% of the coffee market overall. This narrows that, so that I think for Nestle now, they'll command maybe like 20, mid-20 percentage of market share worldwide. And this gives JAB maybe high teens.

So again, they're narrowing that gap. This is a big strategic move for them to get access to Keurig's technology, to their U.S. presence, which, the business might be weak currently, but that doesn't mean that it's not an opportunity for them to roll out Keurig brewers to Europe, where it currently does not compete at all.

O'Reilly: Right.

Shen: And just get a bigger piece of that pie.

O'Reilly: I almost, I mean, there's a lot of things, and this is what I meant by saying that this deal at this price -- I mean, they're paying a growth multiple for not a growth company right now -- it only makes sense for them. Because all of a sudden they have a bunch of different coffee brands, and this is just one thing they could do.

They could throw in some pods, and you already have 20 million Keurig machines installed in the United States. And those pods, I think, it's something like 80% of Keurig's revenues. I mean, that's where the money is. So to roll those out and actually give that business a shot in the arm alone, I don't know, that could be ...

Shen: Well, even if you consider Keurig's had a lot of success doing these kind of promotional partnerships, so, they have their Starbucks coffee in the pods.

O'Reilly: Which may not last.

Shen: Yeah, they, with the new kind of competitive landscape now, where Starbucks is competing directly out of JAB Holding, a lot of their ...

O'Reilly: Peet's Coffee, yeah.

Shen: So whether that partnership continues, we'll have to see. But guess what? There's a whole new portfolio of brands now that Keurig can leverage into new pod offerings, new people, or new customers to target, like we said in Europe, for example, with these brewers, and definitely a big opportunity there. Whether it's worth almost 30 times trailing-12-month earnings for the purchase price is another question.

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