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.
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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.
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.