Peet’s Seen Tempting Starbucks to Top Richest Java Bid: Real M&A

Peet’s Coffee & Tea Inc. has investors wagering rival bidders will attempt to top a $1 billion takeover offer that’s already the most expensive U.S. beverage deal.

Peet’s traded as much as 3 percent above the $73.50-a-share bid from Joh. A. Benckiser last week, signaling some traders who bet on acquisitions expect the Emeryville, California-based company to be sold at a higher price. Including net cash, the $941 million offer values the owner of specialty cafes and grocery products at 21 times earnings before interest, taxes, depreciation and amortization, the richest multiple for an American maker of non-alcoholic drinks in deals larger than $500 million, according to data compiled by Bloomberg.

While surging coffee bean prices have hurt profit, Peet’s boosted its supermarket sales by 30 percent last year. Starbucks Corp. may be interested in making a counterbid to gain a more expensive grocery store brand and prevent Peet’s from expanding its coffee shops, according to Wedbush Inc. Oscar Gruss & Son Inc. says Starbucks, which was founded five years after Peet’s, could pay as much as $80 a share to beat out the offer from JAB, the investment company of the German billionaire Reimann family.

Peet’s “would give them an entree into the gourmet market,” Louis Meyer, a New York-based special situations analyst at Oscar Gruss, said in a telephone interview. “That’s why it is trading over -- because you have a natural, logical buyer that financing any transaction would not be a problem. If you’re going to get a counterbid, you’re going to get something that has the appearance of a knockout counter bid.”

German Suitor

Paul Kranhold, a spokesman for Peet’s, wouldn’t comment on whether the company has been in contact with another bidder or received other offers. Jim Olson, a spokesman for Starbucks, said the Seattle-based company doesn’t comment on market rumors.

JAB, a closely held German holding company, announced on July 23 an agreement to take Peet’s private for about $1 billion plus the assumption of its cash. The firm is gaining control of more than 190 specialty cafes in the U.S. and an expanding business of selling ground coffee and teas to stores such as Whole Foods Market Inc. and Wal-Mart Stores Inc.

JAB, which also disclosed this month a 12 percent stake in Dutch tea and coffee maker D.E Master Blenders 1753 NV, said it expects the Peet’s deal to close in about three months, pending shareholder and regulatory approvals.

Tom Johnson, a spokesman for JAB, said the company wouldn’t comment on Pete’s shares trading above the offer price or whether there may be a rival bidder.

Starbucks Connection

Shares of Peet’s ended at $75.17 on July 27, the highest closing level since the bid was announced. At 2.3 percent more than the takeover price, it’s the second-biggest gap of any pending U.S. deal of at least $500 million, data compiled by Bloomberg show. The stock rose as high as $75.74 last week in intraday trading.

“Given where the stock price is trading, there is a clear indication that many shareholders are thinking that a rival bid will come in,” Nick Setyan, a Los Angeles-based analyst at Wedbush, said in a phone interview.

Today, the shares rose 33 cents to $75.50, the highest closing price since April.

The most likely candidate for a counteroffer is Starbucks, the world’s largest coffee-shop chain, said Keith Moore, an event-driven strategist at MKM Partners LLC in Stamford, Connecticut.

Peet’s is named for Alfred Peet, who founded the company in Berkeley, California, in 1966. Peet mentored Starbucks’ co-founder Gerald Baldwin, who later bought Peet’s and sold the Starbucks chain. Baldwin was Peet’s chief executive officer for about 23 years and still serves as a board member after more than four decades.

‘Premium Offering’

Starbucks, which has a market value of $36 billion, may now be interested in owning Peet’s coffee as a higher-priced option to sell to supermarkets, said Wedbush’s Setyan.

Peet’s “is perceived actually as a more premium offering than Starbucks on the grocery shelf, and they have consistently been able to charge $1 more per 12-ounce bag on the grocery shelf,” said Setyan. “That is something that Starbucks covets.”

Sales from Peet’s grocery-store business increased more than 92 percent in three years to $98.9 million in 2011, according to data compiled by Bloomberg. The company began selling Godiva brand flavored coffees in supermarkets and drug stores in 2009. Peet’s total revenue from coffee shops, grocery stores and office and home delivery is projected to increase 9 percent this year and 10 percent next, analysts’ estimates compiled by Bloomberg show.

While Peet’s had cited rising coffee costs in the first quarter and last year, the company said in May that prices for the commodity were coming down this year.

European Expansion

Starbucks could use its existing distribution channels to roll out Peet’s products in food stores and its coffee shops internationally, Setyan said. While Starbucks operates in more than 50 countries, less than 23 percent of sales were generated outside the U.S. last year, data compiled by Bloomberg show.

“It’s just intriguing given that Starbucks is having trouble penetrating Europe with the Starbucks brand,” said Meyer of Oscar Gruss. “Even though people would know it was from Starbucks, having a totally separate brand from a business approach may be the trick for them.”

Starbucks shares fell 9.4 percent July 27, the most since August, after the company forecast fourth-quarter profit that trailed analysts’ estimates as consumers worldwide reduce their spending.

JM Smucker Co., the $8.4 billion maker of Folgers coffee, and Kraft Foods Inc., which sells Maxwell House and Yuban brand coffee products and has a market value of $70 billion, may also potentially be interested in buying Peet’s, said MKM’s Moore.

Highest Multiple

Maribeth Badertscher, a spokeswoman for Orrville, Ohio-based Smucker, and Michael Mitchell, a spokesman for Northfield, Illinois-based Kraft, said the companies don’t comment on speculation about acquisitions.

While JAB is paying the U.S. industry’s highest multiple relative to it trailing 12-month Ebitda, the 31 percent premium to Peet’s 20-day share price trails the group average of 33 percent, data compiled by Bloomberg show. The offer of $73.50 a share is also less than Peet’s all-time high closing price of $77.14 in March.

Any potential counter bidder may be deterred by the already steep multiple and the difficulty of expanding Peet’s brand significantly outside of California, said Conrad Lyon, an analyst at B. Riley & Co. in Los Angeles.

‘Very Aggressive’

“The valuation seems very aggressive,” he said in a phone interview. “I don’t know if one would necessarily want to pay up for potential growth.”

While Moore says a rival bid from Starbucks is “not highly likely,” he recommended on July 24 that clients take a position in Peet’s in case it or another suitor does enter the fray. Starbucks had $2.23 billion in cash and short-term investments as of April 1 and only $549.6 million in debt, data compiled by Bloomberg show.

“If anyone were to come in, I think it would be Starbucks,” said Wedbush’s Setyan. “They are probably the one company I could think of to make sense and the most likely to have the arsenal -- the money and the firepower -- to acquire Peet’s at these multiples.”