Keurig Green Mountain (GMCR) made headlines on Monday when it was announced that the manufacturer of the iconic K-Cup coffee brewing machine had agreed to be acquired by an investment group for $92 per share — a 78% premium over Friday’s closing price.
The group is led by private equity firm JAB Holding Company, which also has interests in several other coffee companies including Peet’s Coffee & Tea, Caribou Coffee and Jacobs Douwe Egberts.
I find the acquisition interesting for several reasons that merit a closer look. First (and most importantly), JAB Holding purchased GMCR for premium multiples at a time when the company’s earnings were declining: It was bought out at more than the expected 26X fiscal 2016 EPS of $3.37, which is down from last year’s $3.56 and close to 13X trailing EV/EBITDA (enterprise value to earnings before interest, taxes, depreciation and amortization).
Second, there have been concerns over accounting irregularities at GMCR, some of which have come from CNBC contributor Herb Greenberg, who has made a career through his ability to identify stocks that are overvalued.
Another noteworthy bear on the name is hedge fund manager Steve Einhorn, who has shorted GMCR from time to time. If he was short the stock at the time of the acquisition, it would only add to his woes, considering his main fund has already dropped by more than 20% so far in 2015.
Einhorn’s charges of GMCR’s accounting irregularities have revolved around capital expenditures: He claims expenditures that they didn’t need to be as high as the company said they were and that GMCR was actually hiding operating expenses in its capital expenditures and writing them down over several years as opposed to expensing them immediately.
These claims can’t be proved or disproved from publicly available documents, and even though Einhorn has provided quite a bit of detail in order to back his claims, the charges are somewhat speculative.
JAB Holding’s Inside Angle for GMCR
The valuation that JAB Holding is giving Keurig Green Mountain is not inconsistent with some of the multiples currently being seen for other strong consumer brand names such as Starbucks (SBUX), Nike (NKE) and Home Depot (HD). Even a name as mature and troubled (until recently, at least) as McDonald’s (MCD) is selling for more than 21 times next year’s expected earnings.
However, these companies are on more solid ground than GMCR, a company that has been experiencing margin pressure by selling what is arguably a commodity-like piece of hardware in its coffee machines. Still, particular buyers often find value in businesses that are not shared by other companies or the general public.
JAB Holding Company appears to be building a coffee powerhouse, and perhaps it felt that GMCR was simply the missing ingredient before putting its brands together for a massive IPO.
Whether or not this deal works out for JAB in the long run is an open question. Cheap financing has certainly helped to make this buyout possible, and the firm may have been trying to get it done before interest rates are finally increased.
So what’s my takeaway here? The acquisition of GMCR demonstrates the risks of being short stocks that are highly visible to the public and that even the best investors can take significant losses at times. Remember, true value is typically measured differently among potential investors, which is why I always make sure to discuss in great detail the reasons behind each and every one of my recommendations.
Hilary Kramer is the editor of GameChangers, Breakout Stocks Under $10, High Octane Trader, Absolute Capital Return and Value Authority. She is an accomplished investment specialist and market strategist with more than 25 years of experience in portfolio management, equity research, trading, and risk management. She has extensive expertise in global financial management, asset allocation, investment banking and private equity ventures, and is regularly sought after to provide her analysis on Bloomberg, CNBC, Fox Business Network and other media.
