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posted: 1/6/2013 4:08 PM

Coffee deal wave sparks Krispy Kreme-to-Jamba appetite

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  • Krispy Kreme returned to profit in fiscal 2011 after six straight years of losses, data compiled by Bloomberg show.

    Krispy Kreme returned to profit in fiscal 2011 after six straight years of losses, data compiled by Bloomberg show.


Following the biggest surge in takeovers of restaurant and coffee companies since the last recession, Krispy Kreme Doughnuts Inc. and Jamba Inc. could be next on the menu.

Acquisitions of U.S. restaurant, tea and coffee companies from Peet's Coffee & Tea Inc. to Teavana Holdings Inc. reached $6.1 billion last year, the highest level since 2008, according to data compiled by Bloomberg. Deals are on the rise as sales growth at coffee and snack shops are forecast to outpace fast- food chains through 2017, data from IBISWorld Inc. show. Since Joh. A. Benckiser Group announced plans Dec. 17 to buy Caribou Coffee Co., Krispy Kreme shares have climbed 21 percent to the highest in more than five years as Jamba rose 19 percent.

Krispy Kreme, which introduced a new coffee lineup in 2011, and Jamba, the smoothie maker projected to post its first profit since 2005 this year, may be targeted for their well-known brand names and the chance to expand into grocery and mass retail stores, said B. Riley & Co. and Pacific Management Consulting Group. Even after Krispy Kreme shares climbed 43 percent in a year, the doughnut seller still trades at a lower earnings multiple than 97 percent of U.S. restaurants valued at more than $100 million, data compiled by Bloomberg show.

"They're iconic brands and it takes forever to build that brand equity," Conrad Lyon, an analyst at Los Angeles-based B. Riley, said in a telephone interview. "To be able to write a check and add that to your portfolio is probably pretty attractive."

Brian Little, a spokesman for Winston-Salem, North Carolina-based Krispy Kreme, and Matt Lindberg, a spokesman for Emeryville, California-based Jamba, declined to comment on takeover speculation.

In addition to its pending $340 million purchase of Caribou, Benckiser also acquired Peet's last year for about $1 billion. Starbucks Corp.'s approximately $620 million takeover of Teavana was disclosed in November and completed last week.

Those acquisitions helped push industry takeovers last year to the highest since 2008, when deals peaked at $7.5 billion before consumers curbed spending amid the longest U.S. recession since the Great Depression, data compiled by Bloomberg show.

Sales at coffee, hot-beverage and doughnut chains are outpacing fast-food revenue as on-the-go consumers shift to snacks instead of full restaurant meals, according to June and July reports from IBISWorld. Coffee and snack shop sales are forecast to increase 4 percent annually to $33.9 billion in 2017, compared with growth of 1.9 percent a year for fast-food chains, the Santa Monica, California-based researcher said.

Acquirers may be interested in a coffee or beverage chain with a brand that is "strong in the consumer mind," Lyon at B. Riley said. The profit margin for selling beverages is higher than for food, he said.

"Two brands out there that are largely the strongest in their category are Krispy Kreme for doughnuts and Jamba for smoothies," Lyon said.

Jamba, operator of the Jamba Juice chain, sells hummus-and- cheese wraps, flatbreads and frozen yogurt alongside its signature fruit smoothies. The juice maker, founded in 1990, also sells smoothie kits and 90-calorie energy drinks at Wal- Mart Stores Inc. and Target Corp. locations in the U.S.

While Jamba shares rose 71 percent last year as the company announced new store openings and started selling more food, the closing price of $2.48 last week was still 80 percent below its 2006 peak. The company has a market value of $192 million.

"Jamba juice could be pick-up-able," said John Gordon, a San Diego-based principal at restaurant adviser Pacific Management Consulting, with clients including Dunkin' Donuts franchisees. "It would be relatively cheap from a strategic acquisition standpoint. They already have a very large store presence. It's already a brand name."

The company could fetch about a 15 percent premium in a sale, Gordon estimated.

Jamba is projected to post a profit of $7.3 million this year following losses since 2005, analyst estimates compiled by Bloomberg show. After three consecutive years of declining sales, the company also may report revenue gains of 2 percent for 2012 and 6.3 percent this year, the estimates show.

Starbucks may seek to buy Jamba if its Evolution Fresh juice brand, purchased in 2011 for $30 million, doesn't catch on fast enough, said Lyon. There are four Evolution Fresh shops that sell items including spiced carrot juice, mango smoothies and eggs scrambled with brown wild rice. Jamba has about 755 stores in the U.S., of which 301 are company owned, according to the company's November earnings statement.

"It's maybe a great opportunity for Starbucks if they really want to get into that smoothie business and juice business more," he said.

Zack Hutson, a spokesman for Seattle-based Starbucks, declined to comment on whether it's interested in buying Jamba.

Krispy Kreme, founded in 1937, may lure bids from other eateries looking to boost morning food and drinks sales with its cult-like following, Lyon said.

Wendy's Co. may look at Krispy Kreme as a way to boost its breakfast sales, Lyon said. The Dublin, Ohio-based chain, which sells chicken biscuits and home-style potatoes at some locations, has struggled to compete with McDonald's Corp.'s morning menu. The $1.86 billion company backed off testing breakfast in some U.S. markets last year after a disappointing financial performance.

"Most fast-food restaurants in the burger category have a huge opportunity in the breakfast arena," Lyon said. Krispy Kreme is a "great way to expose customers to products in the morning -- and then later in the afternoon, the burgers take over."

Bob Bertini, a spokesman for Wendy's, said the company doesn't comment on speculation.

Krispy Kreme, which began selling a new line of "signature" coffees in 2011, has said it plans to increase coffee to about 12 percent of sales by the end of fiscal 2015. Coffee currently accounts for about 4 percent of sales, the company said in August.

Part of the allure of purchasing coffee companies now is that coffee-bean prices have been falling, Sharon Zackfia, an analyst at William Blair & Co. in Chicago, said in a phone interview. Coffee prices dropped 37 percent in 2012, the biggest annual decrease since 2000, according to data compiled by Bloomberg.

Krispy Kreme returned to profit in fiscal 2011 after six straight years of losses, data compiled by Bloomberg show. Earnings for the third quarter topped analysts' estimates, and the company said that in the fiscal year ending Jan. 31 it will earn more than previously thought. Krispy Kreme has a net cash position of $24 million, the data show.

"It's still a very recognized brand," Gary Bradshaw, a Dallas-based money manager at Hodges Capital Management Inc., which oversees about $800 million including Krispy Kreme shares, said in a phone interview. "The company has returned to profitability. They really cleaned up their balance sheet. It could certainly be bought."

While the improvements sparked a 48 percent stock gain since the Nov. 19 earnings report, Krispy Kreme still trades for 5 times its trailing 12-month profit. That's a lower price- earnings ratio than 97 percent of U.S. restaurants larger than $100 million, the data show. Only Denny's Corp. is cheaper at 4.5 times.

"It's not dirt cheap, but it's an improving picture that we think will continue to get better," Bradshaw said. "There's not a lot you can do if someone comes in and offers $15 a share for the company, but we think if they continue to grow, it could be worth a lot more than that a couple of years out."

Krispy Kreme shares rose almost 11 percent to $11.15 on Jan. 4, giving the company a market value of $727 million, after Alton Stump, an analyst at Longbow Research, initiated coverage with a buy rating and $15 stock price estimate.

Still, the iconic doughnut's nutritional drawbacks may give a possible buyer pause, said Jason Moser, an Alexandria, Virginia-based analyst at the Motley Fool. A glazed doughnut with creme filling has 350 calories, according to the company's website. That's why Krispy Kreme has recently introduced oatmeal and fruit juice to its menu.

While Nick Setyan, a Los Angeles-based analyst at Wedbush Inc., says strategic buyers may be lacking for Krispy Kreme, he also said the company is a potential buyout candidate for a private-equity firm at as much as $13 a share. That would be a 17 percent premium.

"You can capture the future growth at this point," Setyan said. "A lot of the sort of bad news is behind them now."

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