Mergers and Acquisitions

Coffee Company Green Mountain: A Pricey Takeover?


So you think Starbucks (SBUX) is expensive? Green Mountain Coffee Roasters (GMCR) has been growing so fast that Starbucks or any other company looking to scoop it up would pay the highest valuation in the U.S. The shares traded at 295 times cash flow as of Feb. 17, more than any company in the Standard & Poor's 500-stock index, according to data compiled by Bloomberg. Starbucks trades at 15.6 times cash flow.

Green Mountain's growth has been driven by its Keurig business, which sells single-cup brewing systems used in homes and offices, along with the coffee that goes into them. Under Chief Executive Officer Larry Blanford, the company's revenue almost quadrupled in the past three years, helping its market value balloon more than sevenfold, to $5.8 billion. Its 80 percent share of the U.S. single-cup coffee market makes Green Mountain an attractive acquisition target for Coca-Cola (KO) and Nestlé, according to Mitchell Pinheiro, an analyst at Janney Montgomery Scott in Philadelphia. Coca-Cola may see Green Mountain "as a way to get into coffee, which they've never been able to do," he says. "Down the road single cup is going to transform beverage consumption in the home." Pinheiro who recommends buying Green Mountain's shares, values the coffee company at about $9 billion, or 55 percent more than its current market value.

Price-to-cash flow isn't the only measure by which the stock looks expensive. While Green Mountain's revenue increased by 73 percent last fiscal year, to $1.36 billion, the Waterbury (Vt.) company had a higher valuation relative to sales than at least 80 percent of U.S. corporations, Bloomberg data show. Green Mountain is also more expensive than the 13 companies in the S&P 500 and the S&P MidCap 400 that had faster sales growth than it did. "People just can't seem to drink enough coffee," says John Carey, a money manager at Pioneer Investments, which oversees about $250 billion. "The market does get carried away sometimes with higher-growth stocks," he says. Yet "if the acquirer sees more earnings power than is being reflected in the current earnings," the valuation wouldn't seem too expensive. Ben Deutsch, a Coca-Cola spokesman, declined to comment. Says Roddy Child-Villiers, the head of investor relations at Nestlé: "On acquisitions generally, we have been making smaller bolt-ons in developed and emerging markets and will continue to do so." Most of Nestlé's coffee business has been "built organically," he added.

For now, the company with the most impact on Green Mountain is Starbucks. Green Mountain shares surged 10 percent to a record on Feb. 14 because of speculation about a partnership with the world's largest coffee shop operator. Then on Feb. 17, Starbucks CEO Howard Schultz seemed to reject the idea of linking up with Green Mountain, saying in an internal memo that there are "no demonstrated, long-term winners" yet in the single-cup industry and that Starbucks "has a fantastic opportunity to introduce and deliver new single-serve coffee innovations to our customers." The comments sent Green Mountain's stock down 7.7 percent, the biggest decline in two months, to $40.71. The shares closed at $41.10 on Feb. 22. "We do believe in the increasing strength of the single-serving category and the power of the Keurig brand," says Suzanne DuLong, a Green Mountain spokeswoman. The company said on Feb. 22 that it will begin selling Dunkin' Donuts branded packs for the Keurig this summer. Lara Wyss, a spokeswoman for Starbucks, did not return a call seeking comment.

Along with the potential threat from Starbucks, Green Mountain faces the prospect of increasing competition as patents on the Keurig K-Cup system are set to expire next year. "The company has maxed out in terms of growth," says Keith Springer, president of Sacramento (Calif.)-based Springer Financial Advisors, which manages about $100 million. "Now it needs a big brother to come in."

The bottom line: Green Mountain's dominance of the single-cup brewing market has made it a tempting takeover target, even at 295 times cash flow.

Patton is a reporter for Bloomberg News in Chicago.
Tsang is a reporter for Bloomberg News.

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