Deals

Gillian Tan is a Bloomberg Gadfly columnist covering deals and private equity. She previously was a reporter for the Wall Street Journal. She is a qualified chartered accountant.

Shelly Banjo is a Bloomberg Gadfly columnist covering retail and consumer goods. She previously was a reporter at Quartz and the Wall Street Journal.

Not everyone may be cheering JAB Holding's purchase of Keurig Green Mountain for $92 a share -- a whopping 78 percent premium to its Friday closing price.

Dramatically smaller gains or even losses are in store for hedge funds and other investors who bet against the company: Eleven percent of the single-serve coffee-machine maker's shares were tied up in short trades, according to data compiled by Markit and Bloomberg. That's more than triple the S&P 500 Index’s average of 3.2 percent.

Roasted
Keurig's stock had been in free-fall before the deal was announced.
Source: Bloomberg

One such investor could be David Einhorn’s Greenlight Capital, which built a short position in Keurig at an average of $102.08, according to its third-quarter letter to investors. Assuming the firm hasn't trimmed or exited its short position this quarter, it'll be wishing it had locked in its gains when the stock hit a low of $40.50. 

“The second time has been a charm, as our original thesis is playing out,” the letter said, noting Keurig was the firm’s third-biggest winner as of Sept. 30. Greenlight had ended its short position a year earlier, admitting it was unsuccessful with an average sale price at $47.59, compared to its average cover at $67.02.

The hedge fund’s thesis dates back to 2011, when Einhorn said the coffee maker's market opportunity wasn't as great as the company thought and that the 2012 patent expiration on its K-cups would draw competition, leading to slowing sales and profits. He also accused the company of “accounting shenanigans.”  

Also wishing it had emptied its cup sooner is Italian coffee brand Lavazza, which in March trimmed its stake in Keurig to 3 percent from 6.1 percent at an average of $119.18. The company won't lose money on the deal, but it sure would have made more if it had sold its whole stake earlier. 

It's technically a loss at Coca-Cola, which owns 17.4 percent of Keurig and accumulated its stake at an average price of $92.11, according to company filings. But even though Coke lost about $2.85 million, the deal is part of the giant beverage company's strategy to make small bets in growth companies. Now it can cut its losses rather than keep the souring partnership going. It's also likely part of how JAB arrived at its offer price: a deal could have been a tough sell without the support of Keurig’s biggest shareholder.

Meanwhile, executives at Keurig are breathing a huge sigh of relief: The coffee company is the clear winner here as the $13.9 billion deal comes at a low point for the once high-flying coffee roaster.

Cold Coffee
Keurig's once-hot revenue growth has cooled.
Source: Bloomberg

As Bloomberg Gadfly noted last month, knockoff competition and falling sales eroded the valuable pricing leverage Keurig once held on licensing deals with coffee roasters and retail and restaurant chains. That led to price cuts of up to 28 percent on its brewing machines and up to 21 percent on its K-cups, according to Stifel estimates. The company also faces antitrust lawsuits from coffee drinkers and pod makers who claim  it monopolized the market.

Keurig's shares had sunk by 61 percent this year through last week, as investors grew impatient with promises of new products that just kept coming up flat.

And there’s no doubt another frigid holiday season is in store: Its new “Keurig Kold” cold-beverage machine is already marked down to $315 on Amazon, from a $499 list price -- reminiscent of the “Keurig 2.0” machine introduced last holiday season, which retailers started marking down almost immediately following a frosty reaction from shoppers.

JAB might be able to turn things around by taking Keurig private. The family investment company has become a formidable force in the coffee world over the past few years as it's gobbled up D.E. Master Blenders and chains including Peet’s Coffee & Tea, Caribou Coffee and Einstein Noah Restaurant Group.  

The JAB-led investor group is paying around 14 times Keurig's Ebitda in the last year, according to data compiled by Bloomberg. That's in line with the median valuation paid for big U.S. beverage companies in the last decade, but well below the more than 20 times Ebitda JAB paid for Peet's Coffee in 2012.  It's lucky for short-sellers that they're not paying more.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the authors of this story:
Gillian Tan in New York at gtan129@bloomberg.net
Shelly Banjo in New York at sbanjo@bloomberg.net

To contact the editor responsible for this story:
Beth Williams at bewilliams@bloomberg.net