The coffee industry saw a major shake-up Monday morning, with a group led by private equity firm JAB Holding Co. set to buy Keurig Green Mountain for $13.9 billion, (a 78% premium than Friday's stock closing price). JAB is buying it with strategic minority investors — shareholders in Jacobs Douwe Egberts B.V. as well, including Mondelez International. Keurig’s board gave the transaction a unanimous approval.
But why would that group pay such a price for a company whose sales has slumped? Despite the introduction of its new Kold beverage device, Keurig's Q4 revenue sank 13%, hitting $1.04 billion, and single-serve coffee pods saw revenue decline 9%. The news has been so bad lately that the company's stock still went up 20% on these results, profit projections and the announcement that the company would increase its dividend by 13% as of Feb. 16.
"I think it’s definitely a positive for both Keurig and (major Keurig stockholder) The Coca-Cola Company," Euromonitor senior beverages analyst Virginia Lee told Food Dive. "Keurig has struggled recently and I think being away from the public layer and attention of being a public company will help them. They can concentrate on improving marketing and new product development strategy and less time on communicating the investment community."
"The deal provides a bounty to investors after weak results and dimming growth prospects weighed on the stock this year," reported Bloomberg. "Keurig has suffered from waning sales of its K-Cup containers and lower prices on brewers. And a new cold brewer is rolling out more slowly than expected. The strong dollar also is hampering international sales."
This latest news begs the question: Can JAB help revamp Keurig?
Keurig’s mounting struggles and what JAB brings to the table
As mentioned above, Keurig hasn’t exactly been thriving. But it's becoming clear that JAB wants to build a coffee powerhouse.
"Just like you’ve seen Anheuser-Busch InBev consolidate beer, [JAB wants] to consolidate coffee," Pablo Zuanic, an analyst at Susquehanna International Group, said on a recent conference call.
Bloomberg notes JAB is helmed by consumer goods veterans looking to overtake Nestle’s top status in the coffee industry. Lee noted JAB’s purchases of Peet’s Coffee and Caribou in 2012, Peet's recent purchase of Stumptown and Peet's taking a majority stake in Intelligentsia earlier this year. Lee thinks there will be continued consolidation in this manner.
John Maloney, Bloomberg Law's commercial product director for corporate & transactional, noted the reports of JAB’s strategy to take on Nestle and get involved in the sub-category of single-serve coffee. This might trigger competitor Nestle responding, too, and Maloney noted how consolidation is seeping its way into yet another industry. Why the purchase now? The price was right, Maloney told Food Dive.
It remains to be seen whether JAB’s acquisition will disturb Keurig’s dealings with companies like Starbucks and Dunkin’, as their brands appear on K-cups, considering Peet’s and Caribou’s rivalry with coffee franchises, reported Bloomberg. Coffee pod sales have shot up 133,710% since 2000.
Where Coca-Cola stands
Coca-Cola's stake — which has an approximately 17% value in Keurig — is worth $2.4 billion, according to the Atlanta Business Chronicle. The company paid more than $2 billion for a stake in Keurig between February 2014 and February 2015.
"We have enjoyed a strong partnership with Keurig Green Mountain, and will continue our collaboration with JAB in order to capitalize on the growth opportunities in the single-serve, pod-based segment of the cold beverage industry," Coca-Cola CEO Muhtar Kent said in a statement. "We look forward to working with JAB, an experienced operator with a successful track record of investing in and growing consumer companies."
The Chronicle also noted Keurig had been costing the beverage giant money following a stock plunge — specifically $569 million on Aug. 6.
A Barron’s blog reported Wells Fargo’s Bonnie Herzog’s commentary on the deal, with Herzog saying the deal will help Keurig Kold, as the public company couldn’t handle it on its own. Analysts weren’t exactly thrilled with the price of the machine.
Herzog added if Kold indeed performs well under JAB, Coca-Cola could increase its at-home offerings, considering its 10-year partnership with the company.
Coca-Cola has more on its mind than soda, however — it’s tapping into the sparkling water category on its own, debuting a sparkling water version of its smartwater brand.
"Driving the change is the growth of sparkling water, which saw a 22% increase in dollar sales last year on top of a 32% increase in 2013," according to The Motley Fool.
Keurig Kold a goner?
According to Lee, though, Keurig Kold might not remain in Keurig’s category for too long. Given the negative attention around the device's launch, Lee called it "a strong disappointment," and said it doesn’t serve to fix consumer problems in cold beverages. Depending on sales, Lee said Keurig might do away with the product altogether.
Food Dive reached out to Keurig Green Mountain’s media contact but has not yet received comment.
Lee said the acquisition by JAB gives Keurig the opportunity work on helping its coffee and coffee maker products.
Maloney noted JAB has a "clear coffee strategy." Maloney also noted coffee’s growth amid an overall struggling food and beverage industry value on health issues. According to Reuters, Americans paid $11.9 billion for coffee in 2014, with projects heading to $12.8 billion in 2015 and $13.6 billion in 2016.
"As populations grow globally, I don’t see how coffee couldn’t grow," Maloney said.