Zero Hour in Coffee Clash: Greenlight vs. Green Mountain

Einhorn Piles Criticism on Green Mountain Ahead of Earnings, Due Wednesday

By Steve Eder and Julie Jargon

The Wall Street Journal

November 8, 2011

Greenlight vs. Green Mountain, hedge fund against coffee company, is about to reach a boiling point.

Hedge-fund manager David Einhorn, of Greenlight Capital Inc., has pushed to deflate the highflying shares of Green Mountain Coffee Roasters Inc., criticizing them recently at a prominent investor gathering.

For its part, Green Mountain has kept mostly silent, citing a quiet period ahead of its earnings release. Those figures are due Wednesday.

Mr. Einhorn, whose Greenlight Capital holds a "short" position betting against Green Mountain stock, got in one last jab at the company before it breaks its silence. In a Nov. 7 letter to its investors, Greenlight defended the 110-slide presentation Mr. Einhorn delivered last month criticizing Green Mountain's accounting and business practices and all but dared the company's management to issue a rebuttal.

"It is perhaps GMCR's non-response that has been most surprising," Greenlight said in its letter, adding, "It will be interesting to see whether and how management plans to address the serious questions we have raised."

A Green Mountain spokesman declined to comment Tuesday, citing the quiet period.

What Green Mountain says on Wednesday, if anything, will mark the newest chapter in Mr. Einhorn's latest tussle with a company he deems overvalued. Mr. Einhorn, 42 years old and known for his sharp tongue and well-researched take-downs, boasts a successful track record in past skirmishes with executives at Lehman Brothers Holdings Inc. and Allied Capital.

Lehman's collapse and Allied's struggles vindicated Mr. Einhorn's research and burnished his reputation with investors. And while it is unclear how much money Mr. Einhorn's $8 billion firm has at stake now, there is little doubt he will lose some credibility if Green Mountain refutes his claims.

The company has been one of the year's best-performing stocks, more than doubling in value since the start of 2011. Yet the shares began to tumble even before Mr. Einhorn finished his Oct. 17 presentation at the Value Investing Congress in New York.

The stock has inched higher recently, though it is 23% below where it stood before Mr. Einhorn's presentation. Until Greenlight's letter to investors, Mr. Einhorn hadn't reaired his complaints about Green Mountain.

The time has come for Green Mountain to defend itself, or risk losing even more investors, public-relations experts said.

"You cannot sit there and let this happen to you without you doing anything in response, because otherwise, you will just get rolled over," said Michael Robinson, a crisis specialist with Levick Strategic Communications. "A charge unanswered is a charged believed."

While Green Mountain has declined to respond to Mr. Einhorn publicly, the company has been in touch with top shareholders, including Atlanta Capital Management Co., who were closely reviewing the presentation.

"Anytime someone with Einhorn's clout in the marketplace comes out critical of one of our positions, sure we are concerned," said Bill Hackney, the chief investment officer of Atlanta Capital.

Some analysts have also taken up Green Mountain's defense, picking apart Mr. Einhorn's presentation. Janney Montgomery Scott analyst Mitchell Pinheiro said Mr. Einhorn's presentation "rehashed a year-old bear case supported by misinformation and specious conclusions."

In the Nov. 7 letter, Mr. Einhorn's firm chided those analysts for largely ignoring "reports of apparent misconduct" at Green Mountain. The firm also raised new issues about Green Mountain's capital spending as well as its relationship with the company's key fulfillment partner.

Green Mountain has also been the subject of a continuing Securities and Exchange Commission inquiry over the company's accounting policies. Green Mountain said it "continues to cooperate fully with the SEC staff's inquiry," according to an August filing. An SEC spokesman declined to comment.

Mr. Einhorn has his supporters, too.

Whitney Tilson, a fellow value investor, said he had added to his own short position in Green Mountain shares after hearing Mr. Einhorn's presentation.

"We thought he made an airtight argument that the company has much less upside and far more risks than is reflected in its richly valued stock," Mr. Tilson said.

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Write to Steve Eder at steve.eder@wsj.com and Julie Jargon at julie.jargon@wsj.com