It has been ten months since Green Mountain Coffee (GMCR) closed its underwritten public offering of some 9.4 million shares priced at $71 per share.
Sole Book-Running Manager to the offering was BofA Merrill Lynch. Co-Lead Manager was SunTrust Robinson Humphrey. Other participating firms included William Blair & Co., Canaccord Genuity, Janney Montgomery Scott, Piper Jaffray, RBC Capital Markets, and several others.
As long-time market participants, we were quite intrigued with the cast of characters involved in GMCR's latest secondary and more than curious to see how this would play out. We wrote about some of the comments being issued by analysts related to the underwriting firms back in May 19, 2011 on our blog.
The investment banking/analyst angle is nothing new, and when companies need to raise cash, many turn to firms whose analysts have positive recommendations. Shares of GMCR surged in the months following the secondary reaching a 52 week high of over $115 by late September of 2011. The stock is now trading near $50.
We have seen our share of dog and pony shows over the years, but the unusually large underwriting group and their vast relationships between the affiliated analyst firms covering the stock leave us wondering how in the world could they get it so wrong?
Bank of America is a lender to GMCR and we can understand their incentive to handle the secondary. They along with certain affiliates of the underwriters (who were also lenders under GMCR's credit facility) were to be repaid "part of the outstanding balance under our [GMCR's] credit facility".
Bank of America Merrill Lynch analysts had a $90 price target on GMCR following the closing of the secondary. The firm reiterated its $90 target following the Einhorn brouhaha and again after GMCR's Q4 earnings. However, following the announcement by Starbucks (SBUX) of its Verismo brewer, BofA downgraded the stock to Neutral and a $63 price objective.
Meanwhile, Canaccord defended GMCR, and SunTrust (prior to the SBUX news) went as far to suggest buying the dip, seeing a potential positive catalyst for GMCR coming out of the event. William Blair called GMCR's price weakness "a buying opportunity".
Our favorite analyst response comes from Janney's Mitchell Pinheiro who offered this praise of GMCR following the company's Q4 earnings debacle late last year. "In our view", he writes, "GMCR's outlook has never been better".
Ultimately though, how positive can it be when a much better capitalized competitor announces their foray into the single-cup arena? Low-pressure versus high-pressure brewers is not really the issue here. It is about competitive pressures and the ability to finance, maneuver and execute within a competitive market environment.
Starbucks isn't necessarily a shoe-in to wrench control of the single-serve market from GMCR, but they do have superior liquidity and strong market presence to stir things up.
Yet, despite a well orchestrated secondary offering and praise from analysts (many of whom were affiliated w/ underwriters of the secondary) Green Mountain Coffee shares now trade -30% below the offering price.
We would be hard pressed to infer or suggest that any ethical barrier between the various participants was violated (i.e. Chinese Wall) as these "Other Relationships" and "Conflicts of Interest" are clearly disclosed in the 424B7 filed 5/6/2011.
It is not so much the perceived "bias" of the underwriter, market maker and/or analysts recommendations which concerns us. Teamwork is a wonderful way to help maximize an employer's bottom line. Given the vertical integration of broker and dealer operations, their activities are going to be intertwined.
An analyst's ability to generate revenue and profit for their company is likely to be a significant factor in determining his/her compensation. Perceived reputation is also a major consideration. GMCR's price action since the secondary offering suggests that investors disagree with some analyst "perceptions".
Bottom Line: For GMCR to flourish and/or survive will depend on management's ability to generate meaningful cash-flows from operations. We hear arguments all the time about growth as an excuse for why companies don't generate returns-on-equity. Positive cash-flow they say come when sales growth slows and cap-ex moderates.
Seasoned equity offerings (SEOs) benefit underwriters and investment banks more favorably than they do shareholders. We don't doubt the "growth" of GMCR, but this is a company which has grown like a weed for some time now. The irony is GMCR dominates a niche market, yet relies on issuing stock to raise capital.
Starbucks isn't the threat, but it is a wake-up call for GMCR's management to show shareholders their growth is tangible. Forget about the analysts, just show me the cash!