Green Mountain Commands Most Expensive U.S. Valuation: Real M&A

Green Mountain Commands Most Expensive U.S. Valuation: Real M&A

Starbucks Corp CEO Howard Schultz

CEO Howard Schultz said yesterday the world’s largest coffee-shop operator intends to compete directly for sales. Photographer: Ariana Lindquist/Bloomberg

And you think Starbucks is expensive?

Green Mountain Coffee Roasters Inc. has been growing so fast that acquirers looking to scoop up the largest U.S. seller of single-serve brewers would pay the highest valuation in America. The shares, which surged to a record this week on speculation of a partnership with Starbucks Corp., trade at 295 times cash flow, according to data compiled by Bloomberg. That’s more than any company in the Standard & Poor’s 500 Index. By sales, Green Mountain is costlier than eight of 10 U.S. stocks.

Chief Executive Officer Lawrence Blanford has used the Keurig business to almost quadruple Green Mountain’s revenue in the past three years, helping the company’s market value balloon more than sevenfold to $5.8 billion. While its 80 percent share of the U.S. single-cup coffee market makes Green Mountain a target for Coca-Cola Co. and Nestle SA, according to Janney Montgomery Scott LLC, it will still have to contend with Starbucks. CEO Howard Schultz said yesterday the world’s largest coffee-shop operator intends to compete directly for sales.

“People just can’t seem to drink enough coffee,” said John Carey, a Boston-based money manager at Pioneer Investments, which oversees about $250 billion. “The market does get carried away sometimes with higher growth stocks. If the acquirer sees more earnings power than is being reflected in the current earnings, the buyer might have in mind a much lower multiple.”

‘Long-Term Winners’

Starbucks’ Schultz, 57, said in an internal memo yesterday that there are “no demonstrated, long-term winners” yet in the single-cup industry. Seattle-based Starbucks “has a fantastic opportunity to introduce and deliver new single-serve coffee innovations to our customers,” he said.

The comments sent Waterbury, Vermont-based Green Mountain down 7.7 percent, the biggest decline in two months, to $40.71.

“We do believe in the increasing strength of the single- serving category and the power of the Keurig brand,” Suzanne DuLong, a Green Mountain spokeswoman, said in a telephone interview. She declined to comment about potential partnerships.

Lara Wyss, a spokeswoman for Starbucks, did not return a call seeking comment.

Green Mountain is still valued at 295 times its cash flow of 13.8 cents a share in the past 12 months, data compiled by Bloomberg show. No non-financial company in either the S&P 500 or the S&P Midcap 400 Index trades at a higher level. The median multiple for all companies in the Midcap 400, the stock gauge that includes Green Mountain, stands at 12.2 times.

Relative Value

While revenue increased by 73 percent last fiscal year, Green Mountain had a higher valuation relative to sales than at least 80 percent of U.S. companies, data compiled by Bloomberg show. Green Mountain is also more expensive than the 13 companies in the S&P 500 and Midcap 400 that had faster sales growth than the coffee merchant, the data show.

“The company has maxed out in terms of growth,” said Keith Springer, president of Sacramento, California-based Springer Financial Advisors, which manages about $100 million. “Now it needs a big brother to come in.”

Mitchell Pinheiro, an analyst at Janney Montgomery in Philadelphia, says Green Mountain is worth even more and that Coca-Cola of Atlanta and Vevey, Switzerland-based Nestle are companies that have the wherewithal to acquire it.

Financial Ratios

Coca-Cola is rated A2, the third-highest investment grade level, according to Bloomberg’s Company Credit Ratings. The model analyzes borrowers based on their indebtedness, market capitalization, stock volatility, profitability and other financial ratios.

Ben Deutsch, a spokesman for Coca-Cola, declined to comment. Roddy Child-Villiers, head of investor relations at Nestle, did not immediately return a call and e-mail outside normal business hours.

Pinheiro, who recommends buying Green Mountain, valued the coffee company at about $9 billion, or 56 percent more than its current market capitalization. At the level, a takeover would cost 47 times earnings before interest, taxes, depreciation and amortization, according to data compiled by Bloomberg.

That’s more than three times the median multiple of 13.2 for takeovers of food and beverage companies of at least $1 billion during the past five years, the data show. Using Green Mountain’s fiscal 2011 estimated Ebitda would still make an acquisition almost twice as expensive as the industry median.

Expiring Patents

With Starbucks’ Schultz damping speculation that it may partner with Green Mountain, the company also faces the prospect of increasing competition as patents on the Keurig K-Cup system are set to expire next year. Starbucks will win amid the change and innovation in the $4 billion single-serve market, the fastest growing in the global coffee industry, Schultz said.

Options traders are making more bearish bets against Green Mountain. The ratio of outstanding puts to sell shares versus calls to buy has climbed 36 percent this year to 1.22, the highest level since March, data compiled by Bloomberg show.

Put open interest has risen 83 percent to 154,002 since January options expired four weeks ago, more than twice as fast as the increase in calls, which rose 31 percent to 126,237.

Green Mountain spent $10.5 million more in cash on its operations than it brought in last year, even as it reported a 46 percent jump in net income to $79.5 million. The discrepancy was a result of a buildup in inventories and revenue booked for sales for which it had yet to receive payments, according to data compiled by Bloomberg.

K-Cup Royalties

The company had to restate earnings back to 2007 in part because of incorrect costs for K-Cup coffee pods and changes to the recognition of K-Cup royalties, Green Mountain said in a statement in November. The adjustment followed an investigation initiated by the U.S. Securities and Exchange Commission in September into how the company recognizes revenue.

The coffee merchant said in a Feb. 3 regulatory filing that it continues to cooperate fully with the SEC.

Green Mountain had $33 million in cash on hand as of Dec. 25, 2010, and about $1.1 billion in debt, Bloomberg data show.

The loans were used to finance Green Mountain’s purchase of Van Houtte Inc. to gain control of the largest coffee services network in North America. Buying Montreal-based Van Houtte will help expand Green Mountain’s Keurig business in Canada, Blanford said when the deal was announced in September.

Green Mountain is rated B3, the second-lowest investment grade level, according to Bloomberg’s Company Credit Ratings. Moody’s Investors Service ranks the company three levels below investment grade, and Standard & Poor’s rates it five below.

Kitchen Appliances

Elsewhere in mergers and acquisitions, Groupe SEB SA, the world’s largest maker of countertop kitchen appliances, agreed to raise its stake in Hangzhou, China-based Zhejiang Supor Cookware Co. to 71.31 percent from 51.31 percent for 3.46 billion yuan ($526 million).

SEB, based in Ecully, France, agreed to buy the additional 20 percent stake from Supor’s founding shareholders, according to a statement.

There have been 3,119 deals announced globally this year, totaling $279.2 billion, a 31 percent increase from the $213.4 billion in the same period in 2010, according to data compiled by Bloomberg.

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