Green Mountain Coffee: More Shares and More Questions

The rapid-fire corporate events unfolding at Green Mountain Coffee (GMCR) should have shareholders' heads spinning for a while. Company insiders, it appears, will be spinning their heads too, all the way to the bank.

First, an overview of the events:

On May 3^rd, GMCR announces earnings which beat estimates on revenues and eps. In a separate release, the company announces a secondary stock offering.

On May 4, GMCR files a preliminary prospectus supplement related to the offering which as noted by the company “is not complete and may be changed”. Form 424B7 dated May 3, 2011.

On May 6, 2010, the company filed an updated Form 424B7 which revealed more detailed information and a $71 offering price to the public.

Also, leading up to earnings, the company had been busy signing agreements with the likes of Dunkin' Donuts, Starbucks (SBUX) and packaged food maker ConAgra (CAG).

To an average investor, all these agreements and a seemingly rosy earnings report would leave an impression that GMCR is growing (by leaps and bounds to some) and the share price as of last week looks to support this sentiment.

Yet, there are lots of details contained in the prospectus that investors might want to consider:

• 7.5 million shares is now 8.6 million.

• Insiders (officers and directors) are selling $28 million of stock.

There is also a “concurrent” private placement to beneficial shareholder Luigi Lavazza for the right to purchase up to 525,000 shares described in the latest 424B7 as “that number of shares sufficient to maintain its pro rata ownership of our common stock.”

The Lavazza connection is interesting for several reasons. They invested $250 million in GMCR back in Sept. 2010, with lots of strings attached.

According to the latest 424B7, the underwriters in the offering won’t be receiving any compensation for the shares offered by the company “directly” to Lavazza. Since the Lavazza consideration is listed as a private placement, we do not know price or terms of the deal. The filing also states that common stock owened beneficially after the offering excludes the shares Lavazza has the right to purchase.

Excerpt from the May 3^rd prospectus regarding Lavazza:

To maintain its pro rata ownership of our common stock, Lavazza has indicated that it may separately purchase in a concurrent private placement up to approximately 455,707 shares of common stock offered directly from us, but it will not make its final decision until pricing of this offering.

In the May 5^th Prospectus regarding Lavazza:

To maintain its pro rata ownership of our common stock, Lavazza has indicated that it intends to purchase in a concurrent private placement up to 525,638 shares of common stock offered directly from us.

GMCR intends to pay down debt with a portion of proceeds and we note that the sole book-running manager to this offering is B of A Merrill Lynch, who also is affiliated to GMCR’s lender and credit facility.

Ironically, a majority of shares held directly by Chairman of the Board and GMCR founder Bob Stiller are held in margin accounts or pledged as collateral to various financial institutions as security for one or more loans.

Perhaps Lavazza will end up a controlling shareholder vicariously in order to keep GMCR’s heady growth on track. But, who's the huckleberry here?

We understand the lender participation in this offering. They want to get paid.

Lavazza clearly wants to protect its stake in GMCR and maybe they will have brewing technology to keep GMCR growing after the expiration of GMCR's pod patents in 2012. Who knows, maybe Lavazza wants to own GMCR one day?

Regardless, GMCR is playing high stakes poker and the timing of this offering on the heels of eye-popping earnings presents more questions than answers.

Clearly, short-sellers and bears have been eviscerated thus far, but that does not make their argument(s) invalid. If anything, they have been vindicated by about $4 a share (based on GMCR's closing price 5-6-11).

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.