Joh. A Benckiser Looks To Corner The Coffee Market

D.E. Master Blenders 1753 (OTC:DEMBF), the former Sara Lee spinoff is going private after less than a year. Joh. A Benckiser Sarl (JAB) is paying a huge price for the European coffee maker. What does this mean for the rest of the world's coffee manufacturers? Is Green Mountain next? I'll have a look at some of the ways investors can make money from Benckiser's move to corner the coffee market.

Bart Becht
That name probably doesn't ring a bell, but it will soon enough. Becht was CEO of Reckitt Benckiser (OTC:RBGLY) for 12 years until the well regarded (and well paid!) executive surprised the European business community by stepping down from the top job in September 2011. Tired of being the full-time CEO of a public company, Becht instead decided he wanted to spend more time investing in private companies. However, the speculation is Reckitt-Benckiser's board wouldn't support his desire to purchase Colgate-Palmolive (NYSE:CL) so Becht took his ball and went home, and now he's back.

Coffee Consolidation
Well, he actually returned to the spotlight in January 2012, joining JAB, the holding company for Germany's Reiman family, as Chairman and an 8% partner. JAB's main holdings prior to its coffee buying spree were a 10.5% investment in Reckitt Benckiser (French's mustard), 80% of Coty Inc. (Chloe, Sally Hansen) and 100% of Labelux Group (Jimmy Choo, Bally). Owning some serious brands, it could have carried on as is and no one could blame them. Instead, Becht went to work buying up the coffee world.

JAB's first coffee acquisition was a 12.2% stake in D.E. Master Blenders 1753, which it picked up in July 2012. The next investment was Peet's Coffee, which it acquired for $1 billion on October 26, 2012. In January it completed the $340 million purchase of the Caribou Coffee Company. In less than a year Becht had made three moves that had JAB seriously into the beans. Who knew that its biggest move was yet to come?

On April 12 JAB announced that it was acquiring D.E. Master Blenders 1753 for approximately $10 billion including $3.9 billion in debt. Becht made it abundantly obvious that this was only the beginning stating: "DEMB has fantastic brands in Western Europe, Brazil and Australia, but that's clearly not the world … We have a lot of the world to conquer, and clearly acquisitions will be part of that strategy." However, Becht did say that they wouldn't be combining the retail store business (Caribou, Peet's) with the coffee roaster business so my guess is its next acquisition will be a coffee roaster located in the U.S. or Canada.

SEE: Key Players In Mergers And Acquisitions

How To Play This?
JAB is a private company so there isn't a direct way to benefit from Becht's orchestrations. The next possibility is to consider a pure-play coffee roaster that's publicly traded: Green Mountain Coffee Roasters (Nasdaq:GMCR) is the only real option and it would likely fetch an enterprise value of 15 times EBITDA, approximately the same as JAB is paying for D.E. Master Blenders 1753. That would put the price tag at about $12 billion including debt. Given the amount of equity it's putting into the D.E. Master Blenders deal, it's possible that it could pull it off. But I wouldn't bet on it happening in the next six months. JAB first has to digest its current deal.

A good alternative would be to buy the First Trust Consumer Staples AlphaDEX Fund (ARCA:FXG), an ETF with 38 holdings including Green Mountain Coffee Roasters at a weighting of 4.73%. In addition to Green Mountain it holds 3.77% of its portfolio in Mondelez International (Nasdaq:MDLZ), the makers of Maxwell House, the second largest coffee roaster in the world with 11% market share behind only Nestle. If Becht buys either of these you win and if he doesn't, you get a diversified portfolio of consumer staples stocks.

SEE: Analyzing An Acquisition Announcement

Bottom Line
Call it a hunch but I think Becht's next target could be Mother Parkers, a Toronto-based company and the fourth largest coffee roaster in North America. Its annual revenues are approximately $600 million and while small in comparison to D.E. Master Blenders 1753's $4 billion, they've been making a lot of noise recently with its RealCup single-serving capsules. Available on Amazon.com and in most grocery store chains in the U.S., it's the perfect under-the-radar acquisition.

There's only one problem--it's privately held.

At the time of writing, Will Ashworth did not own shares in any of the companies mentioned in this article.

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Categories: Benckiser, Coffee, Corner, Looks, Market