Wednesday, December 2, 2009

Coffee Wars! UPDATE (GMCR, DDRX, PEET)

I wrote about the battle for Diedrich Coffee back on November 23rd.

(Diedrich DDRX) is one of four licensed suppliers to the Keurig K-cup coffee maker, which allows for single brew coffee making.

On November 2nd, Peet's Coffee & Tea (PEET) offered $26 per share for DDRX, in cash and PEET stock. DDRX shares, which had fallen to 20 from 30 in October, jumped on the news. Typically, an unfriendly acquisition like this right after the stock has dropped significantly is NOT well-received by the target's management. Thus they likely put the word out that they were interested in other bidders.

Another bidder quickly emerged - Green Mountain Coffee (GMCR). They own the Keurig coffeemaker, the source of Diedrich's big growth, so would seem to be a much nicer acquisition fit that Peet's. Green Mountain came in with a $30 per share offer for Diedrich, all in cash. Within hours, Peet's returned with an offer of $32 in cash and stock. Here's where the all-cash nature of Green Mountain's bid was so important. While Green Mountain offered a full $30 in cash, Peet's offer was for about $20 in cash and the rest came by way of .321 shares of PEET common stock. With PEET stock falling due to investor nervousness over this deal, the offer price for Diedrich fell with it, making their $32 offer more like a $30 offer.

Interestingly enough, it seems many people expected this battle to drag on, as DDRX traded above either offer price.

Monday night, Peet's sweetened their bid by updating the deal to reflect the decline in its stock price. Basically, the cash component of the deal was increased to a range of $21.26-22.87, to insure that the deal (when you add the .321shares of PEET's stock to the cash component) worked out to $32.50 per share of DDRX. They should have structured the deal in this fashion from the start, to remove volatility from the offered price!

Now, finally, here we are this morning. In the middle of last night, Green Mountain boosted it's offer from $30 in cash for each DDRX share to $35 in cash. This is why Peet's had its work cut out for it by getting in a bidding war with a much larger, richer competitor.

You definitely get the impression Diedrich management would rather hitch their fortunes to Green Mountain, but to be fair to them, they've been very professional in this process toward both suitors.

From last night's release:

GMCR included with its enhanced proposal a revised merger agreement signed by GMCR that reflects the $35.00 per share cash consideration and contains other terms that are more favorable to Diedrich Coffee's stockholders as compared to the existing merger agreement with Peet's, as revised by Peet's recent proposal. More specifically, in addition to the superior consideration, the revised GMCR merger agreement provides for a reduction in the limitations and restrictions on Diedrich Coffee's ability to operate its business during the period prior to the completion of the transaction, as compared to the Peet's merger agreement, as well as an increase in the time period during which Diedrich Coffee may remedy deficiencies relating to the satisfaction of certain conditions to the tender offer.

But wait there's MORE! That release came out at 1:29am Eastern time this morning. Only 50minutes later, Peet's put out their own press release, saying they'll "evaluate" their options. The one thing I'd say is that the mention of potential antitrust issues likely is a weak argument. If the FTC would step in and block a merger (the coffee market, by the way, is NOT a monopoly) in this type of economy is highly unlikely.

“In light of the significant antitrust issues we think are associated with any proposal by GMCR to acquire Diedrich, we believe that the terms of our most recent proposal remain superior,” said Patrick O’Dea, President & CEO of Peet's. “As provided for in our existing merger agreement with Diedrich, we will take the next few days to consider all our alternatives and, as always, take the action we deem to be in the best interests of Peet’s shareholders,” said O’Dea.

Peet's shares are at $32.75, off 24% from recent highs. This is lower than the $34 it fetched in the wake of its terrific 3rd quarter results released back on October 27th.
Of the opportunities for profit here, I'd be inclined to go with Peet's. If they pull off a miracle and wind up with DDRX for the stock's current 20 times earnings, it's a win. If they walk away from the deal, you get PEET's stock here at the same price as the post-earnings bump.
DDRX
PEET
GMCR

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