Coffee prices have been rising for the past five years, hitting a 13-year peak of nearly $2/lb for arabica beans on September 8. The rising cost of beans has put pressure on coffee company profits, but that may be about to change with today’s announcement that Green Mountain Coffee Roasters Inc. (NASDAQ: GMCR) has acquired Canadian coffee roaster LJVH Holdings, Inc., better known as Van Houtte, from a private equity firm for $890 million.
The acquisition is expected to close by the end of 2010, subject to regulatory approvals and other customary closing conditions. Van Houtte has been a licensee of Green Mountain’s Keurig brand of single-cup coffee packs since 2001.
Green Mountain will finance the transaction with cash and debt financing, although the company did not specify how much of either. It did say that the debt financing would include a $750 million senior securing revolving credit facility, a $250 million five-year secured term loan and a $350 million six-year secured term loan. According to the company, the debt “will be utilized to finance this acquisition and transaction expenses, as well as to refinance GMCR’s existing outstanding indebtedness and support our ongoing growth.”
This deal probably couldn’t have come at a better time. Bloomberg reported yesterday that prospects for a bigger-than-expected coffee harvest are leading hedge funds to reduce their net-long positions on coffee futures, sending the price of arabica beans to an expected $1.52/lb in the fourth quarter.
Kraft Foods Inc. (NYSE: KFT) has raised some coffee prices twice since May to keep up with the price increases for beans. Starbucks Corp. (NASDAQ: SBUX) has said that higher commodity prices would add about $0.04/share to its expenses for the fiscal year ending in September 2011. The J.M. Smucker Co. (NYSE: SJM) has lifted prices by an average of +9% for its brands that include Folgers.
Militating against a large decline in arabica prices is demand, which continues to grow. Supplies are expected to exceed demand by about 880 million pounds by September 2011. But right now, US supply is at its lowest point in more than 10 years, and the surplus at season’s end, September 30th, will be just over 132 million pounds.
Green Mountain said that it expects the Van Houtte “acquisition will be neutral to slightly dilutive to its earnings per share in the first twelve months after closing.” If coffee prices continue to fall, Green Mountain might get a nice surprise.
As of this writing, Paul Ausick did not own a position in any of the stocks named here.
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