Deals

Tara Lachapelle is a Bloomberg Gadfly columnist covering deals. She previously wrote an M&A column for Bloomberg News.

What goes great with a cuppa Joe? A tasty doughnut.  

JAB Holdings, which swallowed the Keurig Green Mountain coffee company in March, is now scarfing down Krispy Kreme Doughnuts in a $1.35 billion transaction announced Monday morning. At $21 a share, the price is 25 percent higher than Krispy Kreme's average closing level over the past 20 trading sessions. 

It's a sweet deal -- unless, of course, you're one of the traders that began shorting Krispy Kreme last month. Short interest had surged to nearly 6 percent, the highest in a year, after the shares staged a rally despite the company having reported disappointing fourth-quarter sales. The takeover is likely causing a mini-squeeze. 

Bears Get Bitten
Short sellers didn't see JAB's offer coming. Krispy Kreme surged on news of the deal, in which JAB is paying 25 percent more than the stock's average price for the past 20 trading days.
Source: Markit, Bloomberg

The deal comes little more than a year after the doughnut chain eliminated the takeover-defense mechanism it adopted in 2013. Getting rid of it faintly signaled to shareholders and potential suitors that it was open to being bought. But at the time, the speculation was that Jollibee Foods would be the buyer because the Philippine restaurant operator had said it was planning to team up with a financial partner to acquire a U.S.-based fast-food company with a market value of at least $1 billion. It still hasn't done so.

Is there enough glaze on JAB's offer? On the one hand, Krispy Kreme just posted one of its worst same-store sales figures since 2009, and its earnings forecast for this year is below analysts' expectations. And while the offer is higher than where Krispy Kreme's shares traded over the past year, five of six analysts tracked by Bloomberg predicted the stock would climb to $21 or higher on its own this year. 

Room for Improvement
Krispy Kreme isn't growing revenue as quickly as it once did, but JAB has room to boost profitability. The chain already licenses its coffee to Keurig, which is now owned by JAB.
Source: Bloomberg

That said, JAB is paying about 19 times Krispy Kreme's trailing 12-month Ebitda (or 16 times the consensus estimate for this year), which may be too rich a multiple for other financial buyers to top. The deal also probably makes the most sense for JAB, which wants to be the Budweiser of coffee, as Pablo Zuanic, an analyst for Susquehanna, put it in December when the Keurig deal was announced.  Over the years, JAB has also taken control of Peet's Coffee & Tea, bagel company Einstein Noah Restaurant Group, Caribou Coffee and Jacobs Douwe Egberts. 

Coffee House
JAB has made several acquisitions of coffee and doughtnut shops in a short time.
Source: Bloomberg

Krispy Kreme shares were trading Monday only 5 cents shy of the takeover price, as investors were hesitant to bet on a competing bid. Instead, they should be thinking about what JAB could crave next. Dunkin' Donuts, anyone? 

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

  1. JAB led an investor group that also comprised snacks giant Mondelez International and affiliates of BDT Capital Partners. 

To contact the author of this story:
Tara Lachapelle in New York at tlachapelle@bloomberg.net

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