Green Mountain success may put it in play

By Mihir Dalal

BANGALORE (BestGrowthStock) – Green Mountain Coffee Roasters Inc’s near-monopoly in single-cup brewing, just 4 years after it bought coffee machine maker Keurig, makes it a compelling target for food or consumer products giants seeking entry to a fast-growth part of the U.S. beverages market.

Revenues at the company — ranked 2nd on Fortune magazine’s 2010 list of the world’s fastest-growing companies — are next year forecast to top $2 billion, and its stock price has already soared 10-fold since its Keurig acquisition.

“Green Mountain has a very strong product line, strong execution, and the growth they’re seeing now would make them very attractive to consumer product companies, not just beverage companies,” Piper Jaffray analyst Anthony Gikas said.

Gikas cited Nestle SA, McDonald’s, Coca-Cola Co and Procter & Gamble Co as some names linked to possible buyout interest in the specialty coffee firm.

“Single-cup brewing is a major consumer trend that will lead to short-term and long-term conversion of home coffee brewing, and Keurig is, and will continue to be, the leading player in the sector,” Canaccord Genuity’s Scott Van Winkle wrote in a note.

Vermont-based Green Mountain — founded by Bob Stiller with the proceeds from his 1980 sale of cigarette paper maker E-Z Wider — has grown rapidly in large part due to its razor/razor blade business model — selling coffee machines to consumers at cost so it can then sell its K-Cup coffee refills at an attractive margin.

The strong profits from K-Cups have made its licensees — those outside firms allowed to make K-Cups — very attractive to Green Mountain. So attractive, it has snapped up all four of them in the past 18 months or so for around $1.4 billion.

“By bringing the licensees in-house it’s able to capture more operating profit per K-Cup as opposed to just getting royalty. That makes Green Mountain worth more,” said Janney Montgomery Scott analyst Mitchell Pinheiro.

Pinheiro reckons suitors are more likely to be beverage firms or a coffee market leader.

The biggest listed U.S. coffee company is Starbucks Corp, which already partners Kraft Foods Inc on Tassimo, a rival single-cup brewing machine.

Piper Jaffray’s Gikas thinks Kraft and other rivals would be more likely suitors as Keurig has dominated competing products from food giants Sara Lee Corp and Nestle.

He does not expect anti-trust issues to hamper a deal.

“Green Mountain has 5 percent of the overall U.S. home coffee market. You have to look at it from their participation in the overall market (not just in single-cup).”

“To see it being acquired in the next two years would not surprise me,” Gikas said.

Ric Rhinehart, executive director of the Specialty Coffee Association of America, said, “It might make sense (for Nestle to buy Green Mountain) because Nestle has essentially no roasting ground presence in the U.S. at all. Almost all the penetration in the U.S. market is in soluble coffee.”

In an interview with Reuters last week, Nestle CEO Paul Bulcke said acquisitions were among the company’s priorities for using its cash reserves, but he declined to comment on specific targets.

AN EXPENSIVE CUPPA

Shares in Green Mountain had rocketed to around $38 last month, a 10-fold jump since 2006 — though a Securities and Exchange Commission probe into the way the company recognizes revenue has weighed more recently.

Given the dizzying stock returns to date, what kind of bid might tempt shareholders?

“Any company buying Green Mountain will be basing their valuation not on today’s earnings, but earnings 2-3 years out,” Pinheiro said.

“If you assume $330 million of EBITDA in 2011, and a financing cost of 3 percent, somebody could pay $11 billion (including debt) for Green Mountain.”

Pinheiro says his estimate is conservative.

Indeed, the consensus forecast on Thomson Reuters I/B/E/S is for $350 million in 2011 earnings before interest, tax, depreciation and amortization.

However, the stock’s recent one-fifth decline under the SEC cloud is unlikely to trigger takeover offers — at least not on the cheap.

“Green Mountain has a strong poison pill that effectively means that when it is ready to be sold, they will sell, and not until then,” Pinheiro said.

“Do we think that one day, Green Mountain will be part of a larger company? Yes. But it’s going be on Green Mountain’s terms.”

(Reporting by Mihir Dalal in Bangalore, Editing by Ian Geoghegan)

Green Mountain success may put it in play