Peet's won't give up fight in bidding war with Green Mountain Coffee over Diedrich's

Peet’s Coffee & Tea, Inc of Emeryville, CA, announced yesterday that it has upped its bid for Diedrich Coffee Inc another 50 cents per share to the equivalent of $32.50 in cash and stock. Peet's was first to make a proposal to buy the southern California coffee company, but Green Mountain Coffee Roasters of Waterbury, Vermont, has twice matched Peet's offer in all cash, which the Diedrich's board of directors has stated was a superior offer to Peet's offer.
GMCR wants to pair its March acquisition of Tully's, from Seattle, to expand its K-Cup offerings the length of the West Coast. GMCR in November bought the wholesale division of Timothy's, a Canadian coffee roaster (Bruegger's, a Sun Capital Partners affiliate based in Burlington, will run the retail operation of Timothy's). Much of the largesse of this rapid expansion by GMCR is the result of a 5,000,000-share stock issuance at $67.25 last August. The company lost very little share value at the time and has seen its stock price rebound since then.
Green Mountain Coffee is considering how to respond to this latest offer from Peet's and issued the following statement today:
“We are focused on creating value for our shareholders,” said Lawrence J. Blanford, President and Chief Executive Officer of GMCR. “In that regard, we remain firmly committed to this strategic combination and are in the process of evaluating our next steps.”
GMCR is confident that a combination with Diedrich will benefit consumers by enhancing the robust choice of products, the statement said. With respect to timing, GMCR noted that it has thoroughly evaluated this transaction and is confident it can close promptly in early 2010. The coffee and coffee maker businesses are very large and highly fragmented and GMCR’s sales constitute just a small fraction in each, it said. GMCR believes that Peet’s comments regarding a perceived timing advantage (see below) are significantly exaggerated and that Peet’s is now resorting to misrepresentations in the absence of being able to offer significantly more value to Diedrich shareholders, it said.
Additionally, GMCR’s all-cash offer continues to be the superior proposal of record. In contrast, Peet’s offer has a significant stock component and its shares have demonstrated significant volatility over the last 90 days, GMCR stated. GMCR believes that Diedrich shareholders will recognize that a transaction with Peet’s would result in a highly leveraged company.
BofA Merrill Lynch is serving as financial advisor to GMCR on this transaction and Ropes & Gray LLP is serving as its legal advisor.
Peet's stock was trading at about $32.60 per share this morning, while Green Mountain Coffee was trading at about $63. GMCR, Peet's and Diedrich's are all trading slightly up today.
Under Peet's enhanced proposal, the stock component remains at 0.321 of a share of Peet’s common stock, and the cash component will be an amount between $21.26 and $22.87 such that the value of the total consideration paid per Diedrich share equals $32.50 for all Peet’s common stock prices between $30 and $35.00. If Peet’s volume-weighted average stock price over a designated period prior to the completion of the exchange offer is $35 or higher, the value of the offer would increase above $32.50 per share, and if Peet’s average stock price over that period is $30.00 or lower, the value of the offer would decrease below $32.50. Peet’s stock closed today at $32.56 on the Nasdaq Global Select Market.
When Peet’s originally presented its November 22, 2009 proposal, Peet’s stock price was $38.00, which valued the proposal at $32 per Diedrich share. By November 24, 2009, following the announcement of a competing bid for Diedrich by Green Mountain Coffee Roasters, Peet’s proposal was valued at $30.35 per Diedrich share based on the $32.86 closing price of Peet’s common stock on November 24, 2009.
Peet’s presented the details of its modified proposal in a November 30, 2009 letter to the Diedrich board of directors. Peet’s also reiterated its intention and capability to close the transaction before year-end 2009, while GMCR referred in its November 25, 2009, press release to a closing of its proposed transaction in early 2010. In addition, GMCR’s proposed definitive agreement with Diedrich allows it to extend the latest date by which the transaction must be completed to June 29, 2010 in the event of failure to obtain Hart-Scott-Rodino antitrust clearance. Peet’s accelerated the corresponding date in its enhanced proposal from March 31, 2010 to February 15, 2010, with no extension for Hart-Scott-Rodino clearance. Peet’s views these timing differences to be a material factor in making Peet’s proposal superior to GMCR’s.
Under Peet’s enhanced proposal, as with its previous proposal, outstanding warrants and options to acquire Diedrich common stock will also be converted into the right to receive a combination of cash and shares of Peet’s common stock.
"In light of the antitrust challenges that Diedrich and GMCR acknowledge in their proposed agreement, along with the higher price, upside potential and greater protection against downside risk in our proposal, we strongly believe this new proposal to be clearly superior to the GMCR offer," said Patrick O’Dea, President and CEO of Peet’s.
Peet’s board of directors is being advised on antitrust matters by Kevin Arquit of Simpson Thacher & Bartlett LLP.
“We continue to believe that our acquisition of Diedrich would create significant value for the stockholders of both companies,” said Mr. O’Dea. “We also remain convinced that Peet’s participation in the single serve K-Cup market would bring much-needed competition to that market that would benefit both consumers and retail trade customers while also accelerating household penetration of the Keurig brewer system,” added O’Dea.
Assuming Peet’s enhanced proposal is accepted, Peet’s expects the acquisition to be dilutive to earnings in 2010 and accretive thereafter. Peet’s expects fully-diluted earnings per share to be in the range of $0.70 to $0.80 in 2010 and $2.00 to $2.10 in 2011. Peet’s plans to finance the cash portion of the acquisition through a combination of cash on hand (at both companies) and $175 million of committed debt financing from Rabobank Nederland.
Cooley Godward Kronish LLP is acting as Peet’s legal advisor; Simpson Thacher & Bartlett LLP is acting as legal advisor on antitrust matters. Morgan Stanley and Jesse Capital Management are serving as financial advisors.
Sources: Peet's, 11.30.2009. GMCR, 12.1.2009. BUSINESS WIRE