JAB-led investor group to acquire K-cup maker Keurig for $13.9 billion

By Anjali Athavaley and Sruthi Ramakrishnan

(Reuters) - Germany's JAB Holding Co is leading a $13.9 billion buyout of Keurig Green Mountain Inc , known for its K-Cup single-serve coffee pods, in a deal that would strengthen its position in North America.

The deal, pitched at a rich 78 percent premium to Keurig's Friday closing price, is the latest by JAB, the investment vehicle of the billionaire Reimann family, as it tries to become a formidable competitor to world coffee market leader Nestle SA .

This would be the biggest coffee acquisition for JAB, whose other holdings include controlling stakes in cosmetics company Coty Inc and luxury goods maker Jimmy Choo .

"It's a demanding valuation," said Vontobel analyst Jean-Philippe Bertschy, who estimates the deal price represents a multiple of about 15 times earnings before interest, taxes, depreciation and amortisation. The stock was trading around eight times EBITDA last week, he said.

But for JAB, he said, "it's a fantastic opportunity for them to be really a global player in the coffee market. Now they can have some scale in the U.S."

Keurig is the leader in the $6.1 billion North American single-serve coffee market, with a 61 percent market share, according to market research firm Euromonitor International. Nestle has only a small presence in that business.

JAB already has other coffee investments in its portfolio and is known for successfully expanding other consumer brands. It formed a joint venture in July called Jacobs Douwe Egberts, now the largest pure-play coffee company, by combining its D.E. Master Blenders 1753 business with the coffee business of Mondelez International Inc .

JAB also bought U.S. coffee companies Caribou Coffee Co and Peet's Coffee & Tea in 2012.

Keurig stock was up 73.2 percent at $89.60 in midday trading, below the offer price of $92.00 per share.

The stock, which last traded at $92 in May, is heavily shorted, with nearly 13 percent of the total float held by investors who had bet that the shares would fall.

As of Oct. 21, those holding short positions included David Einhorn's Greenlight Capital.

FALLING SALES

The deal comes as Keurig has struggled with declining sales because of increased competition and slower-than-expected adoption of its newer 2.0 brewers due to consumers' confusion over whether the machines could brew certain brands.

Analysts have also raised questions on the growth prospects for the company's latest countertop device, a single-serve cold drink maker called Keurig Kold, due to its high price and disappointing rollout.

As a result, Keurig had lost more than 60 percent of its market value this year up to Friday's close.

Coca-Cola Co , Keurig's biggest single shareholder, said it would receive cash for its 17.4 percent stake in the Vermont-based company for a net gain of $25.5 million on its investment. Coke bought a 10 percent stake in Keurig last year and added to its holding this year.

Keurig has partnered with Coke and Dr. Pepper Snapple Group Inc on branded pods for its Kold machine.

Coke's shares were little changed at $43.12. The Atlanta-based company said in a statement that it expected to continue to collaborate with JAB on pods for Kold.

While Coke has acquired companies in the past after buying a minority stake, Sanford Bernstein analyst Ali Dibadj said he was not surprised that this did not happen with Keurig.

The soda maker is mainly interested in Keurig's cold beverage business, he said. "I think it really makes more sense for someone with coffee experience to take this one on."

Shares of at-home beverage maker SodaStream International Ltd rose 10.4 percent to $15.48.

Susquehanna Financial Group analyst Pablo Zuanic attributed the rise to the "apparent vanishing of the (Coca-Cola) threat in at-home cold drink solutions." But he said he doubted a buyer would emerge for SodaStream unless PepsiCo Inc was interested.

JAB is acquiring Keurig in partnership with investors that are already shareholders in Jacobs Douwe Egberts, including Mondelez and entities affiliated with BDT Capital Partners.

The deal is expected to close in the first quarter of 2016.

BofA Merrill Lynch and Credit Suisse provided fairness opinions to Keurig.

(Additional reporting by Martinne Geller in London; Editing by Saumyadeb Chakrabarty and Lisa Von Ahn)