Caribou Coffee - Investors Could Bet On A Revised Higher Offer

Dec.18.12 | About: Caribou Coffee (CBOU)

Shares of Caribou Coffee (CBOU) rose more than 30% in Monday's trading session. The operator of coffee houses agreed to be taken over by Joh. A. Benckiser for $16 per share.

The Deal

Caribou, which according to its own website is the second largest premium coffeehouse operator of the US, agreed to be taken over by Joh. A. Benckiser.

Caribou has entered into a definitive merger agreement in which the firm will sell itself for $16 per share. The all cash deal values the firm at $340 million. Caribou which was founded in 1992, operates over 601 coffeehouses in total.

Non-executive chairman Gary Graves commented on the deal, "Caribou Coffee is a great company, with dedicated people, world-class customer service, exceptionally high quality coffeehouse beverages and food and a state-of-the-art roasting facility. The employees of Caribou should feel very proud of all they've been able to accomplish over the years, and I look forward to continued success in Caribou's future."

For the full year of 2011, Caribou generated revenues of $326.5 million. The company net earned $35.2 million in that year, driven by one-time items. The deal values Caribou at 1.0 times annual revenues and 9-10 times annual earnings. So far in 2012, Caribou has been far less profitable, given the lack of incidental profit items.

Joh. A. Benckiser continues to operate Caribou as an independent company with its own brand, team and strategy. Benckiser is a privately-held group which has more long term investments in the same sector. The firm owns or holds stakes in Peet's Coffee & Tea, Reckitt Benckiser Group and D.E. Masters Blenders 1753, among others.

The deal has been approved by independent directors of Caribou, and represents a premium of roughly 30% over Friday's closing price.

Valuation

Caribou ended its third quarter with $28.6 million in cash and equivalents. The company operates without the assumption of debt, for a modest net cash position.

For the first nine months of 2012, Caribou generated revenues of $238.9 million. The firm reported a net income of $5.7 million attributable to shareholders, or $0.27 per diluted share.

The $16 offer values the firm at $340 million. This values operating assets at roughly $311 million, if we subtract the net cash position. This values the firm at 1.0 times 2012s expected annual revenues and roughly 40 times annual earnings.

Some Historical Perspective

Year to date, shares of Caribou have risen some 15%, including Monday's gains. Shares rose from $14 in January to highs of $19 in April of the year. Shares fell to lows of $10 in May after Caribou lowered its full year outlook.

Shares of Caribou have risen from lows of $1.50 in 2009 to highs of $19 earlier this year. Between 2008 and 2012, Caribou increased its annual revenues by more than a quarter to $325 million. The company has structurally improved its profitability.

Investment Thesis

Benckiser, which is the holding company of a wealthy German family, has boosted its stakes in many more well known consumer brands. During summer, the company acquired Peet's Coffee & Tea (PEET) for close to $1 billion, or roughly 2.5 times 2011s full year revenues. That multiple is in line with Starbuck's (SBUX) revenue multiple of 2.6 times 2012s revenues.

Bart Becht, the chairman of Benckiser commented on the acquisition which his firm made. "Caribou has a fantastic brand and unique culture, and fits perfectly with JAB's investment philosophy of investing in premium and unique brands in attractive growth categories like coffee. JAB is committed to investing in Caribou as a standalone business out of Minneapolis to ensure the company continues its current highly successful track record."

Tender Or Not Tender?

Investors are in doubt whether to tender their shares. While far less profitable than some of its competitors, Caribou is valued at roughly 1.0 times annual revenues. This compares to multiples which are much higher for Peet's Coffee and Starbucks, among others.

Shares had seen a rough year as shipments to Green Mountain Coffee Roasters (GMCR) have been down in recent months as a result of intensified competition from Starbucks. The consequential profit warning made shares ripe for a takeover. Some commentators have already argued that the offer price is too low, given the low revenue multiple.

With shares trading just 10 cents above the offer price of $16.00 per share, it might be worth the gamble to hold on to your shares. Investors can only lose 10 cents compared to the offer price, assuming the deal goes through, while there might be an opportunity for a revised upwards offer.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.