Big Moves in the Coffee Corner
I have to admit that it caught me a little off-guard. Not that it happened, but the way it happened. Last night at 7:30 pm I received the news that Peet's Coffee & Tea (Nasdaq:PEET) is buying Deidrich Coffee (Nasdaq:DDRX) for $212 million in cash and stock.
A week and a half ago, on Friday, October 23rd, I wrote about jumping on small-cap stocks that are surging with industry momentum.
"Small-cap companies are overlooked and underappreciated by many investors because it's not economical for analysts to follow them. Until the companies start to break-out, and then they are all the rage. Find them when they are taking-off, and you can ride them for handsome gains."
I went on to talk about coffee companies that are hitching a ride on the success of market trends in larger companies such as online retailer Amazon. My description of this ride on the value-chain (food-chain?) went like this.
"Diedrich is hitching a ride on the success of Green Mountain Coffee Roasters (Nasdaq:GMCR) K-Cup coffee packs. But both of these companies are hitching a ride on the success of online retailers like Amazon. You see, online retailers have scalability on their side, something other distribution channels don't have. Online retailers can reach to the far corners of the United States, or abroad..."
Finally, I said you should be on the lookout for Peet's Coffee to make a move into the K-Cup single-serve market. And when they do, you should jump on their stock. This is the sales channel that has completely changed the coffee market landscape, and small-cap coffee companies are riding the wave.
"The e-commerce sales channel is making it possible for small-cap companies to expand their sales by multiples that would otherwise be unheard of. Green Mountain Coffee Roasters is up over 300% this year. Another premium coffee roaster, Peet's Coffee, is up 35%. You can get their grounds on Amazon too, but not in a K-Cup. Be on the lookout. If Peet's strikes a partnership with Green Mountain Coffee Roasters to package their grounds in K-Cups, jump all over Peet's stock."
Well, they did, and investors are. But Peet's didn't strike the relationship directly; they simply bought Diedrich which already had it. As I've mentioned, Diedrich started the year as a $0.30 stock. It's now trading at over $25.
From Peet's President and CEO Patrick O'Dea, in a statement, "The Diedrich acquisition represents another major strategic growth initiative for our consumer packaged coffee business, by entering and driving adoption of the single cup segment through Diedrich's high-growth K-Cup business."
Here are some of the details on the acquisition as of this morning:
· The deal values Diedrich at $26/shr
· It will add value to Peet's Coffee after 2010 and should close by the end of 2009
· It was done to get Peet's coffee into the single-cup coffee market
· The deal represents a 28% premium for Diedrich's stock over Monday's closing price
· Diedrich is a wholesale coffee roaster and distributor and has a licensing agreement to make and sell K-Cup refills for Green Mountain Coffee Roasters single-cup Keurig brewer system.
· Peet's acquires Diedrich's portfolio of brands including Diedrich Coffee, Coffee People and the single-serve rights to the Gloria Jean's coffee brand.
· Peet's said it will finance the acquisition through a combination of cash on hand and $140 million of debt financing.
I've been watching these companies for some time now and I must admit, I'm pretty pleased to have been in front of this one. This morning, Peet's Coffee shares are trading up 10% to $38, a full 35% higher then the closing price the day I wrote that article. Hopefully you were able to use my October 23 issue of SmallCapInvestorDaily to make some money on these stocks.
In the big picture, it's great to see this kind of acquisition activity in small-cap stocks. Especially when we consider that Peet's was able to get debt financing. It shows that even though there is increasing volatility in the market, there are opportunities for alert investors to ride a wave of popularity and profit.
