Peet's Coffee & Tea (Nasdaq:PEET) announced July 23 that Joh. A. Benckiser has agreed to acquire the specialty coffee and tea company for close to $1 billion, or $73.50 a share. The purchase price is a 29% premium over the closing stock price on July 20. Immediately, the ambulance chasers were out with no less than 10 law firms announcing investigations into possible breaches of fiduciary duty by Peet's management and board. The major contention being that analysts have valued its stock price as high as $95 a share. Frankly, these investigations aren't worth the paper they're written on. This is a reasonable deal; I'll explain why.

Investopedia Broker Guides: Enhance your trading with the tools from today's top online brokers.

Peer Group

In Peet's DEF 14A its Compensation Committee includes 12 companies in its peer company benchmark. Absent from the discussion is Starbucks (Nasdaq:SBUX), whose history is intertwined with the Berkeley institution, primarily because of its size. So, for now I'll ignore Starbucks and look at some of its peers that are similar in size both in terms of revenues and earnings.

On the revenue side of the coin, the most similar in size is Caribou Coffee (Nasdaq:CBOU), whose trailing 12-month revenue is $349 million, $58 million less than Peet's. Caribou trades at a price-to-sales ratio of 0.74 times compared to 2.56 times for Peet's. That's 71% lower. Yet the revenue and earnings growth estimates are basically the same with Peet's holding a considerable advantage in terms of operating profits, much of which is due to the quality of its coffee and the resulting higher prices. However, that doesn't justify a 2013 forward P/E of 41, which is what these law firms feel Joh. A. Benckiser should pay. That seems like a lot for a business with just $30 million in net profits, 196 locations primarily on the West Coast and $158 million in grocery and food service sales. Clearly the existing group has taken it as far as it can.

Coffee Behemoths

I live in Toronto. In February, a weekly paper I like to read indicated there are 151 Starbucks locations in the city and 249 Tim Hortons (NYSE:THI). That's double the entire Peet's chain nationwide. Dunkin' Brands Group (Nasdaq:DNKN) announced earlier this year that it plans to double its coffee shops over the next 20 years from the current 7,000 in the United States. Tim Hortons, which has 3,315 stores in Canada and is easily the number one coffee retailer here, is also growing in the U.S. In the first quarter it opened seven stores bringing its total to 721, almost four times the number of Peet's locations. Since 2000, Peet's has never opened more than 30 locations (2007) in any given year, averaging 13 annually. The only way it's going to be able to grow is through acquisitions, which takes money and time, two things public companies often don't have. A more likely scenario is the new owners sell the retail locations to someone like Tim Hortons, open a few flagship stores to remain in the public eye and focus on its consumer packaged goods business, which is far more profitable.

The Bottom Line

At $73.50 a share, Peet's enterprise value is 20 times EBITDA, more than Starbucks, Dunkin, Tim Hortons and Caribou. Peet's might have good coffee but if these lawyers think they can suck blood out of a stone, they've got another thing coming. Claims that management breached their fiduciary duty are completely unfounded; shareholders should accept the offer and tender their shares. It's a very good deal.

At the time of writing, Will Ashworth did not own shares in any of the companies mentioned in this article.

Related Articles
  1. Stock Analysis

    How Toyota Succeeds at Home and Abroad (TM)

    Japan's biggest car manufacturer is also one of North America's biggest, delighting shareholders with its high profit margins.
  2. Stock Analysis

    Starbucks: Profiting One Cup at a Time (SBUX)

    Starbucks is everywhere. But is it a worthwhile business? Ask the shareholders who've made it one of the world's most successful companies.
  3. Stock Analysis

    How Medtronic Makes Money (MDT)

    Here's the story of an American medical device firm that covers almost every segment in medicine and recently moved to Ireland to pay less in taxes.
  4. Investing News

    Latest Labor Numbers: Good News for the Market?

    Some economic numbers are indicating that the labor market is outperforming the stock market. Should investors be bullish?
  5. Investing News

    Stocks with Big Dividend Yields: 'It's a Trap!'

    Should you seek high yielding-dividend stocks in the current investment environment?
  6. Investing News

    Should You Be Betting with Buffett Right Now?

    Following Warren Buffett's stock picks has historically been a good strategy. Is considering his biggest holdings in 2016 a good idea?
  7. Products and Investments

    Cash vs. Stocks: How to Decide Which is Best

    Is it better to keep your money in cash or is a down market a good time to buy stocks at a lower cost?
  8. Investing News

    Who Does Cheap Oil Benefit? See This Stock (DG)

    Cheap oil won't benefit most companies, but this retailer might buck that trend.
  9. Investing

    How to Ballast a Portfolio with Bonds

    If January and early February performance is any guide, there’s a new normal in financial markets today: Heightened volatility.
  10. Stock Analysis

    Performance Review: Emerging Markets Equities in 2015

    Find out why emerging markets struggled in 2015 and why a half-decade long trend of poor returns is proving optimistic growth investors wrong.
RELATED FAQS
  1. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  2. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  3. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  4. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  5. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>
  6. What is the difference between issued share capital and subscribed share capital?

    The difference between subscribed share capital and issued share capital is the former relates to the amount of stock for ... Read Full Answer >>
COMPANIES IN THIS ARTICLE
Trading Center