German investor Joh A Benckiser (JAB) is to buy the owner of Douwe Egberts coffee in a 7.5-billion-euro ($9.8 billion) deal to create a global hot drinks empire aimed at taking on market leaders Nestle and Mondelez.
D.E Master Blenders 1753, the Dutch owner of Douwe Egberts coffee and Pickwick tea, said on Friday it had reached conditional agreement on a 12.50 euros per share cash takeover offer from a group of investors led by JAB.
JAB, the investment vehicle of the billionaire Reimann family, has been building a hot drinks business in a bid to tap strong growth driven by new products, such as single-serve coffee brewers, and demand from emerging markets.
Its brands include Caribou Coffee and Peet's Coffee & Tea in the United States, while D.E Master Blenders will give it a strong position in Europe.
The offer is below JAB's original proposal of 12.75 euros per share, but still represents a 36 percent premium to D.E. Master Blenders' average closing share price in the three months to March 27, when the initial proposal was disclosed.
Analysts said the price compared favorably with recent similar deals and saw little chance of a rival bid, not least because JAB already owns around 15 percent of D.E Master Blenders, meaning it will actually pay about 6.4 billion euros.
"We consider the probability of a higher offer to be slim," said KBC Securities analysts Pascale Weber and Jan-Willem Billiet in a note, recommending investors accept the offer.
They said the price represented a ratio of enterprise value (debt plus equity) to forecast earnings before interest, tax, depreciation and amortization (EBITDA) for 2014 of 15.7 times.
By comparison, analysts have pointed to the recent takeover of Heinz, which was done at a 2013 EV/EBITDA of 14.6 times.
D.E Master Blenders declined to specify why the offer price had been reduced from the initial proposal and chief executive Jan Bennink, who will step down after the takeover, said it had not had contacts with other potential buyers.
Platform for Growth
"JAB and its partners intend to use DEMB as their platform for both organic growth as well as acquisitions in the fast-moving consumer goods coffee and tea categories," said JAB Chairman Bart Becht, a former chief executive of Reckitt Benckiser who will become chairman of the Dutch company.
The Reimann fortune comes from the Benckiser chemicals company, founded in 1823. The family also controls fashion group Coty, and owns Labelux Group, manager of luxury brands Bally, Belstaff and Jimmy Choo.
Becht told reporters there were no plans to combine the Dutch firm with JAB's coffee businesses in the United States, citing a lack of synergies.
D.E Master Blenders, which also owns Senseo coffee, has had a rocky time since it was spun off last year from Sara Lee, which has since changed its name to Hillshire Brands.
Within weeks of its listing, it shocked investors with the news its Brazilian unit had been hit by fraud, tax and inventory problems, forcing it to restate past financial statements.
Previous CEO Michael Herkemij quit in December, just six months after the stock market debut, and in February the firm reported lower-than-expected profits and cut its outlook for 2013 citing pricing pressures in austerity-hit Europe.
Market leader Nestle's coffee sales had a retail value of $17.12 billion last year, while Mondelez International ranked second at $8.32 billion, according to Euromonitor International.
D.E Master Blenders ranks third with annual sales of about 2.66 billion euros.
JAB said it would finance the deal through a combination of roughly 3 billion euros of debt and about 4.9 billion euro in equity, and said it has committed financing from arrangers Bank of America, Citibank, Rabobank and Morgan Stanley. The deal is conditional on issues including regulatory approval.
Leonardo & Co., BDT & Company, Bank of America Merrill Lynch and Rabobank/Rothschild are financial advisers to JAB. Lazard is lead financial adviser to D.E Master Blenders, with Goldman Sachs and JP Morgan also acting as financial advisers.