Master Blenders to Buy Mondelez Coffee Unit for $5B

JAB Holding Co., the investment arm of the billionaire Reimann family, agreed to pay Mondelez International Inc. $5 billion in cash to create the world’s second-biggest coffee company and step up the challenge to Nestle SA.

A company led by JAB will combine Mondelez’s coffee unit with D.E Master Blenders 1753 BV, giving it control of brands such as Jacobs, according to a statement today. Mondelez will gain a 49 percent stake in the new company, which will be named Jacobs Douwe Egberts and based in the Netherlands.

The move is the latest step from JAB to consolidate in coffee. The company, co-headed by former Reckitt Benckiser Group Plc Chief Executive Officer Bart Becht, last year bought Master Blenders, the Amsterdam-based maker of Douwe Egberts, for about 7.5 billion euros ($10.4 billion). That transaction, the industry’s biggest deal ever, was followed by purchases of Peet’s Coffee & Tea Inc. and Caribou Coffee Inc.

Mondelez shares rose 8.2 percent to $38.10 in New York. The maker of Oreo cookies also said today that it intends to cut at least $1.5 billion in costs by 2018. It’s aiming to expand its profit margin wider than the 15 percent to 16 percent it previously promised by 2016.

Merging the Mondelez unit with brands such as Douwe Egberts will allow the combined company to capitalize on “significant growth opportunities in a highly attractive market,” Pierre Laubies, CEO of Master Blenders and prospective head of the new entity, said in the statement.

‘Formidable Competitor’

The merged entity will have sales in excess of $7 billion and be the market leader in countries such as France and Austria. The transaction, which excludes Mondelez’s coffee business in France, should close next year.

“A combined D.E Master Blenders/Mondelez coffee business will likely make for a formidable competitor for Nestle,” Jeff Stent, an analyst at Exane BNP Paribas, wrote in a note shortly after the deal was announced.

Nestle, based in Vevey, Switzerland, is the world’s biggest coffee maker, owning Nespresso, Nescafe and other brands.

The purchase of the Mondelez division follows a surge in prices for coffee. Robusta coffee futures have climbed 27 percent this year to $2,142 a metric ton in London, and are up 6.6 percent in the past 12 months. Arabica coffee futures surged 83 percent this year in New York to $2.0305 a pound, advancing 42 percent in the past 12 months.

Master Blenders was advised by Lazard Ltd., BDT Capital Partners, Goldman Sachs Group Inc. and JPMorgan Chase & Co. JAB worked with Bank of America Corp. and Morgan Stanley. Mondelez was advised by Perella Weinberg Partners LP and Centerview Partners.

‘Volatile Asset’

For Mondelez, the transaction “removes a volatile asset from the company while allowing it to retain an equity stake in the combined company,” Chris Growe, an analyst at Stifel Financial Corp. in St. Louis, said today in a note.

Mondelez’s coffee sales fell by a low-single-digit percentage during fiscal year 2013 in a total beverage unit that gained 1 percent. Mondelez and other coffee makers lowered prices as the cost of raw coffee plummeted. That was most pronounced in roast and ground coffee, which made up about 40 percent of the company’s coffee sales, CEO Irene Rosenfeld said during a February conference call.

Mondelez didn’t provide specifics as to how the $1.5 billion savings announced today would be generated. Mike Mitchell, a spokesman, said the initiatives would focus immediately on policies and processes globally.

“We would expect that there will be fewer roles in the organization in the future,” Mitchell said by e-mail. “We’re in early days, so there are no specifics to share right now.”

Investor Pressure

Ralph Whitworth said in April that his activist fund was pushing Mondelez to improve margins, and warned “the jury is out” on whether current management can deliver. The co-founder of Relational Investors LLC joined Trian Fund Management LP’s Nelson Peltz in pressuring the company for better margins.

“We’re working behind the scenes to try to urge change there,” Whitworth said April 22 at the Active-Passive Investor Summit in New York. “Does the current management have the ability to get the job done? That’s a question mark. If they don’t, I think that you’ll probably see some changes there.”

The coming restructuring will reverse the slowdown in snacks growth and improve profit margins at Mondelez, Rosenfeld said today in an interview, declining to respond directly to Whitworth’s threat.

“I run this company for the benefit of all of our shareholders,” Rosenfeld said. “I am pleased by the progress that we have made to date.”

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