Mondelez International, Inc. Market Cap (as of 08/05/14) $64.28bn
D.E Master Blenders 1753 Market Cap (as of 08/05/14) N/A
Mondelez International Inc and its competitor D.E Master Blenders 1753 have agreed to merge their coffee businesses, forming a new company aimed at taking on the market leader Nestle SA and allowing Mondelez to focus on its snack portfolio.
The new company, to be called Jacobs Douwe Egberts, will be a joint venture controlled by D.E Master Blenders’ parent JAB Holding Co. It will unite the brands of the second- and third-largest coffee companies by sales: Mondelez’s grocery coffee brands such as Carte Noire and Gevalia with D.E Master Blenders’ L’OR, Pilao and Senseo brands respectively.
Under the terms of the deal announced on May 7, 2014 Mondelez, the US snacks group best known for Cadbury chocolate and Oreo cookies, will receive $5bn in cash for its coffee business from D.E Master Blenders and a 49% equity stake in the joint venture. Mondelez said it would use the majority of the $5bn proceeds to expand its $2bn share buyback program and the remainder to pay down debt.
The coffee merger is said to be “strategic” and “elegant” as stated in the client notes by Wall Street analysts. The merger should remove Mondelez’s coffee business from its operating results since the company had to struggle a lot with volatile green coffee prices. In fact, both Robusta coffee and Arabica coffee futures have risen in the last 12 months showing an expected increase in coffee prices. On the other hand, Mondelez expects snacks to account for about 85% of net revenue in the future, compared with 75% currently, which in turn is expected to bolster the earnings. The new company, with annual turnover of more than $7bn, is expected to become a global pure-play coffee powerhouse, though still significantly smaller than the coffee business owned by Nestle, which operates the Nescafe and Coffee-Mate brands. According to Bart Becht, who will be the Chairman of the new company, the merger will open opportunities to introduce the Senseo home coffee brewer to new markets and will allow the new company to expand in the instant coffee arena.
Coffee companies worldwide have been struggling with volatile coffee prices, but the coffee business currently offers some very interesting opportunities for those players who have a sufficient size and sufficient brand value to exploit such opportunities. The global coffee market, excluding coffee retailers, was estimated to be worth $75.8bn in 2012 and $50.4bn in 2007 (Euromonitor), which implies an 8.5% CAGR. Among the key drivers of growth for the future, analysts identify especially the rising incomes and growth of emerging country’s middle class and the premiumization of coffee. Expanding in the instant coffee arena, very appreciated in emerging markets like China, where the tea-drinking culture is strong and importing roast and ground coffee has instead proven tough for all competitors, and expanding in the sale of coffee machines and other premium products are fundamental initiatives global coffee makers must undertake to position themselves to successfully exploit these growth drivers.
In addition, Mondelez detailed a $3.5bn restructuring plan which combined with the coffee deal will help accelerate margin growth and help cut overhead costs. On May 7, 2014 Mondelez also reported a 15% jump in EPS to 39 cent that beat Wall Street expectations. Shares rallied 7.7% to $37.93 on the news.
D.E Master Blenders 1753 was delisted on October 29, 2013 as the result of the acquisition of more than 95% of the shares by Oak Leaf, a newly incorporated company wholly owned by a Joh. A. Benckiser (JAB) led investor group.
Mondelez was advised by Perella Weinberg Partners and Centerview Partners and D.E Master Blenders was advised by Lazard, BDT, Goldman Sachs and JP Morgan.
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