JAB’s pricy coffee shot is not as dumb as it looks
The author is a Reuters Breakingviews columnist. The opinions expressed are her own.
By Aimee Donnellan
LONDON, Oct 21 (Reuters Breakingviews) -JAB’s marked-up coffee shot has more logic than it seems. The European investment house hiked its stake in coffee maker JDE Peet's JDEP.AS to 68% after buying out Mondelez International’s MDLZ.O stake. The rich 32% premium and jittery outlook for coffee prices may raise eyebrows. But JDE’s depressed valuation provides some comfort.
JDE and Oreo maker Mondelez’s history goes back to 2014. The coffee maker was formed out of a merger between JAB’s D.E Master Blenders and Mondelez’s coffee business. In 2020, JDE Peet's was floated on the Amsterdam stock exchange at 31.50 euros a share and both Mondelez and JAB retained large stakes in the business. But on Monday, JAB announced it had bought Mondelez’s remaining 17.6% stake for 25.10 euros a share, equivalent to a 32% premium to JDE’s closing share price on Friday.
The share purchase solves a couple of big headaches for JDE and JAB. Shares in the Douwe Egberts-seller have been under pressure due to the rising cost of coffee grains, which have soared to an over 10-year high, and the challenges of passing that on to cash-strapped consumers. The stock has also suffered from the fear that Mondelez might dump its shares on the market, given the relatively limited free float of around 20%.
Buying the shares also gives JAB more security. JDE’s lacklustre share price performance raised the risk of an interloper buying Mondelez’s stake. JAB meanwhile needs to distribute 9% of its 59% holding to investors in its own consumer fund, loosening its grip on the group. The Mondelez stake acquisition leaves it firmly in control, with a 68% holding even after the distribution, and solves the overhang.
JAB can also argue that even with the premium, the price isn’t too rich. At 25.10 euros a share, it is paying some 14 times JDE's estimated 2025 earnings, using LSEG data, in line with its average forward price to earnings ratio over the last two years.
The trade might backfire if coffee prices stay high, and punters steer clear of spending money in stores, where a lot of JDE coffee gets sold. Still, inflation is falling, helping consumer confidence. And JDE’s profit outlook is looking a little frothier. Its operating margin, which fell to 13.8% last year, is expected to steadily increase in the coming years and reach nearly 16% by 2028, according to LSEG estimates. That make JAB’s pricey coffee shot easier to swallow.
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CONTEXT NEWS
JAB said it would acquire Mondelez’s 17.6% stake in coffee maker JDE Peet’s, sending the company’s shares up as much as 16% on Oct. 21.
JAB will pay 25.10 euros a share for Mondelez’s stake, a 32% premium to JDE Peet’s closing price on Oct. 18. At the same time it will distribute 9% of the shares it previously held to its own investors. As a result, JAB’s stake in JDE Peet’s will rise to 68%.
JDE Peet’s shares were trading at 22.06 euros a share as of 0924 GMT.
JAB is buying a bigger slab of JDE Peet's on the cheap https://reut.rs/3NACN5M
Editing by Neil Unmack and Streisand Neto
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