JAB grinds out $9.8bn coffee deal

June 2013 | FEATURE | MERGERS & ACQUISITIONS

Financier Worldwide Magazine

A group of investors led by German consumer products conglomerate Joh. A. Benckiser (JAB) announced on 12 April it had agreed to acquire European tea and coffee company DE Master Blenders 1753 (DEMB) for €7.5bn ($9.8bn). The proposed deal, which has been unanimously recommended by the board of DEMB, is still subject to regulatory approval. The takeover will be put to DEMB’s shareholders in early July.

DEMB is the Dutch owner of Douwe Egberts, the world’s third largest coffee company, and it currently reports approximately $3bn in annual sales. However, DEMB comfortably trails market leader Nestlé which enjoys a 23 percent share of the global coffee and tea industry, and Mondelez International, a spinoff of Kraft Foods, which has 11 percent.

The two companies began negotiating around the beginning of March before eventually agreeing a deal valued at €12.50 per share – a price well below the proposed €12.75 per share originally offered by JAB. The cash bid for DEMB is worth roughly €7.8bn including debt, meaning that JAB will be paying 15.6 times forward EBITDA. However, despite the drop in value, the agreed price still represents a 36 percent premium on the stock’s average closing price in the three months prior to the deal being announced.

Norman Sorensen, non-executive chairman of DEMB said in a joint statement “after having carefully and diligently assessed JAB’s offer, resulting in today’s intended offer, the board fully supports and unanimously recommends this offer to the shareholders for acceptance. The offer price is a clear reflection of the value DEMB represents. The fact that JAB will use DEMB as a platform for further growth and has guaranteed to keep its headquarters, R&D and major production sites in the Netherlands, gives the board confidence that this offer is in the best interest of employees, shareholders and all other stakeholders”.

JAB has been a minority shareholder in DEMB for some time. The group already owned approximately 15.05 percent of the company and it is believed that this pre-existing ownership stake may have discouraged competing bids from other companies. The terms of the deal state that JAB’s purchase of the company can be cancelled should a superior offer be made. The takeover will be financed with €3bn of debt, with an additional €4.9bn of funding sourced from minority investors. In a statement JAB also noted that it had secured financing from the Bank of America, Citibank, Rabobank and Morgan Stanley. Once completed, the takeover will see DEMB’s debt rise to €3bn from €258m.

The acquisition of DEMB consolidates JAB’s standing in the tea and coffee market; the company already owns Caribou Coffee Co Inc and Peet’s Coffee & Tea Inc. DEMB completed the acquisitions of Caribou and Peet’s in 2012 for $340m and $1bn respectively. JAB has also been attempting to tap into the lucrative single server coffee machine market, with the purchase of DEMB helping to facilitate this move. The Dutch firm currently produces coffee pods for the popular Nespresso coffee machines.

JAB is also keen to utilise DEMB’s market position in order to capitalise on the growing demand for coffee from the emerging markets. According to data from market research company Euromonitor, the value of the global coffee industry will grow 36 percent to $103bn in the next five years. The takeover also helps establish JAB in the Western European coffee market, where DEMB already has a strong presence with its Douwe Egberts, Senseo Coffee and other tea and coffee brands.

In a statement, Bart Becht, chairman of JAB, said “We are extremely pleased with our intended offer to acquire DEMB. We believe DEMB has a very strong management team, fantastic brands, and enormous expertise and potential in the coffee and tea categories. JAB and its partners intend to use DEMB as their platform for both organic growth as well as acquisitions in the fast moving consumer goods coffee and tea categories.”

Mr Becht, who will now become the chairman of DEMB, also noted that the company plans to keep the Dutch firm separate from its coffee shop businesses in the US, as there are few synergies between the retail aspect of the business and the packaged goods industry. “Running a coffee shop is a totally different business from selling coffee to the WalMarts of the world. Bringing the companies under one roof would make me very nervous,” he explained.

However, Mr Becht also noted that JAB will continue to explore further investment and acquisition opportunities in both the retail and packaged coffee markets. “DEMB has fantastic brands in Western Europe, Brazil and Argentina, but that’s clearly not the world,” he said. “We have a lot of the world to conquer, and clearly acquisitions will be part of that strategy.”

Richard Summerfield