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. Investing

    Build a Retirement Portfolio for a Different World

    When it comes to retirement rules of thumb, the financial industry is experiencing new guidelines and the new rules for navigating retirement.
  2. Stock Analysis

    Net Neutrality: Pros and Cons

    The fight over net neutrality has become an amazing spectacle. But at its core, it's yet another skirmish in cable television's war to remain relevant.
  3. Investing

    Top Cities Where Airbnb Is Legal Or Illegal

    Thinking of subletting your apartment on Airbnb? Make sure that you meet your city's regulations first.
  4. Forex Education

    China's Devaluation of the Yuan

    Just over one week ago the People’s Bank of China (PBOC) surprised markets with three consecutive devaluations of the yuan, knocking over 3% off its value.
  5. Personal Finance

    A Day in the Life of an Equity Research Analyst

    What does an equity research analyst do on an everyday basis?
  6. Mutual Funds & ETFs

    ETF Analysis: PowerShares S&P 500 Downside Hedged

    Find out about the PowerShares S&P 500 Downside Hedged ETF, and learn detailed information about characteristics, suitability and recommendations of it.
  7. Mutual Funds & ETFs

    ETF Analysis: ProShares Large Cap Core Plus

    Learn information about the ProShares Large Cap Core Plus ETF, and explore detailed analysis of its characteristics, suitability and recommendations.
  8. Mutual Funds & ETFs

    ETF Analysis: iShares Core Growth Allocation

    Find out about the iShares Core Growth Allocation Fund, and learn detailed information about its characteristics, suitability and recommendations.
  9. Mutual Funds & ETFs

    ETF Analysis: iShares MSCI USA Minimum Volatility

    Learn about the iShares MSCI USA Minimum Volatility exchange-traded fund, which invests in low-volatility equities traded on the U.S. stock market.
  10. Stock Analysis

    Should You Follow Millionaires into This Sector?

    Millionaire investors—and those who follow them—should take another look at the current economic situation before making any more investment decisions.
RELATED TERMS
  1. Equity

    The value of an asset less the value of all liabilities on that ...
  2. Hard-To-Sell Asset

    An asset that is extremely difficult to dispose of either due ...
  3. Sucker Yield

    When an investor has essentially risked all of his capital for ...
  4. PT (Perseroan Terbatas)

    An acronym for Perseroan Terbatas, which is Limited Liability ...
  5. Ltd. (Limited)

    An abbreviation of "limited," Ltd. is a suffix that ...
  6. BHD (Berhad)

    The suffix Bhd. is an abbreviation of a Malay word "berhad," ...
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 >>

You May Also Like

COMPANIES IN THIS ARTICLE
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!