Management

This Green Mountain Trade Doesn't Smell Right


Green Mountain's K-Cup brewer: Competition is brewing from a new Starbucks machine

Photograph by David Paul Morris/Bloomberg

Green Mountain's K-Cup brewer: Competition is brewing from a new Starbucks machine

Robert Stiller, founder and chairman of Green Mountain Coffee Roasters (GMCR), sold $66.3 million of his company’s stock before it plunged on news that Starbucks (SBUX) had developed a rival product to its K-Cup brewing system. Stiller’s combined sales on Feb. 15 and 24 were his largest in a single month since at least 2003, when the stock traded below $2, data compiled by Bloomberg show. He would have earned $13.7 million less had he sold on March 9, when the shares fell 16 percent after Starbucks unveiled its machine for home-brewing single cups of espresso and coffee.

In a March 9 regulatory filing, Green Mountain acknowledged having “recently learned of Starbucks’s planned initiative in the espresso-based single-cup category.” Starbucks had an existing agreement to sell coffee for Green Mountain’s K-Cup system. Spokesmen for Green Mountain wouldn’t specify what information it received about the plan and when. “It’s something that the SEC would want to look at,” says James Cox, a securities law professor at Duke University in Durham, N.C. “If he has inside information, he has to withdraw from the market.”

Florence Harmon, a Securities and Exchange Commission spokeswoman, declined to comment. Starbucks informed Green Mountain of its plans before its March 8 announcement, according to Alisa Martinez, a spokeswoman for the Seattle-based company. She wouldn’t elaborate on the exact timing. Darren Brandt, a spokesman for Green Mountain, declined to comment on behalf of the company and Stiller.

Green Mountain is struggling to retain market share as it braces for the September expiration of its main patents on K-Cups. The plastic coffee capsules have dominated single-serve coffee making in the U.S., with flavors including Gloria Jean’s Butter Toffee Coffee and Wolfgang Puck’s Jamaica Me Crazy. As other companies prepare their own machines, the Waterbury (Vt.)-based company’s stock has more than halved, to $51.91, in the six months through March 27.

In February, Stiller reduced his direct stake in Green Mountain by 6.9 percent, selling a total of 1 million shares, according to filings with the SEC. The sales weren’t marked as so-called 10b5-1 transactions, a type of pre-programmed trade that managers set up in advance to show they aren’t basing decisions on inside information.

Stiller founded Green Mountain in 1981 as a small Vermont cafe and remains the largest individual shareholder with 13.4 million shares, or 8.7 percent of the company, according to data compiled by Bloomberg. He is also the second-biggest shareholder of Krispy Kreme Doughnuts (KKD) and the largest stakeholder of pizza chain Noble Romans (NROM).

Green Mountain, which logged $2.7 billion in revenue in its 2011 fiscal year, has faced criticism from hedge fund manager David Einhorn, who in October questioned its accounting and said its market share has peaked. “With Green Mountain’s patents expiring this fall, Starbucks’s entry is part of the competitive onslaught hitting Green Mountain,” said Einhorn, president of Greenlight Capital, in an e-mail in March.

Stiller submitted paperwork dated Aug. 4 to the SEC showing he wanted to sell as many as 2 million shares. He sold only 500,000 that day, a separate filing shows. Even if those documents showed intent to further reduce his stake, the February trades would be “problematic” if he had information from Starbucks about its plans, says Onnig Dombalagian, a professor at Tulane University Law School in New Orleans and former fellow at the SEC.

Green Mountain, in a March 9 press release, said its K-Cup system and a new brewer, called Vue, are different from the new Starbucks machine, Verismo. Green Mountain’s machines use “low pressure to extract maximum flavor,” as opposed to espresso machines using “high pressure and high temperature to produce a more intense taste profile,” according to the release. On March 21, the companies said Starbucks will also sell capsules that work with the Vue. Green Mountain’s stock jumped 10 percent on that announcement.

The bottom line: Green Mountain’s chairman sold $66.3 million in shares before an announcement by rival Starbucks that knocked down the stock.

Abelson is a reporter for Bloomberg News in New York.
Patton is a reporter for Bloomberg News in Chicago.

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Companies Mentioned

  • GMCR
    (Keurig Green Mountain Inc)
    • $120.68 USD
    • -0.32
    • -0.27%
  • SBUX
    (Starbucks Corp)
    • $78.74 USD
    • -1.71
    • -2.17%
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