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March 29, 2013 1:54 pm
Like a teenager on a tear, DE Master Blenders 1753 has packed a lot into its brief independent life. Cast off from the Sara Lee mother ship less than a year ago, the Netherlands-based coffee company had warned of accounting irregularities within two months of its Dutch float; saw its chief executive depart at the end of 2012; experienced a comprehensive management overhaul under Jan Bennink, its well-regarded chairman; and, most recently, downgraded 2013 guidance.
Now there is talk of an offer at €12.75 a share from JAB, a Benckiser-led investor group. This is the private holding company for Germany’s wealthy Riemann family, co-managed by ex-Reckitt Benckiser boss Bart Becht.
Benckiser has been snapping up coffee assets recently and already owns 15 per cent of DE. Given such an eventful year, DE shareholders may wonder whether a €7.6bn bid – assuming it materialises – is fair. This should not trouble them for long. The indicated price implies an enterprise value to 2013-14 consensus earnings before interest, tax, depreciation and amortisation ratio of about 15 times. That is a generous premium to the 10-12 times multiples attached to Danone, Nestlé and Unilever.
Of course there may be suspicions that Mr Bennink’s overhaul is poised to produce results and that JAB wants to move before these materialise.
Well, maybe. But there are also execution risks to the changes, which focus on driving up margins through a mix of cost-cutting, innovative products and rejuvenated packaging.
Last month DE cited price pressures in western Europe, its highest-margin region for retail sales, and competition for its Senseo products from Nestlé’s Dolce Gusto. The out-of-home coffee market (a quarter of revenues) is also sluggish, although DE does see long-term growth.
The chance of rival bids also seems slim. Big rivals Nestlé and Kraft would probably face antitrust issues, although private equity cannot be ruled out. Benckiser, moreover, could see some synergies given its recent Caribou and Peet’s purchases in the US.
Above all, investors would do well to remember that coffee, for all the fancy marketing, is boiling water and beans. Brew up a nice espresso and hope this offer materialises.
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