Greenberg: Finer Grinds of Green Mountain Deal

Now that Starbucks has agreed to use Green Mountain’s Keurig system for its push into single-serve, giving the stocks of both a caffeinated jolt. A few key points:


The economics of the deal have not been disclosed; that means there is no way to know just how much the Starbucks relationship, which shifts into gear this fall, will contribute to Green Mountain’s earnings . So far, Green Mountain hasn’t said.

The multi-year deal is not exclusive. Jeff Hansberry, president of Starbucks Global Consumer Products Group, told me this morning that Starbucks is “still exploring other opportunities” in single serve. “There’s a long and wide runway for growth in the single-serve space,” he says.

Patents start to expire next year on the current Keurig system and K-Cups. Green Mountain recently started talking about new technology and patents. Does this deal apply to the new technology? “We’re still working through details on that,” Hansberry said.

This isn’t Starbucks first foray into single-serve. It originally was part of the Tassimo system through a now dead distribution deal with Kraft. How will this single-serve be different than Tassimo? “The Keurig machine has a huge installed base,” Hansberry says.

In addition:

There will be multiple Starbucks flavors.

Distribution will be handled by Starbucks, not Green Mountain.

It’s unclear how much Starbucks’ K-Cups will cannibalize Green Mountain’s.

Before the deal, JP Morgan analyst John Ivankoe, was telling his clients that he believes single-service will be incremental to Starbucks store sales but could easily be a $1 billion in revenue business in the U.S. alone, translating to $300 million of operating income, or 27 cents a share.

As for Green Mountain, Janney Montgomery Scott — the big bull on the stock — is speculating that the deal could add 30 cents a share to annual earnings. While not changing estimates, analyst Michael Pinheiro boosted his fair value target to $90 from $62.

My take: Both companies are winners, but without knowing the economics of the deal it's impossible to know for sure how it will filter down to their bottom lines.

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