By Leslie Patton & Tara
Lachapelle
January 6, 2013
Following the biggest surge in
takeovers of restaurant and coffee companies since the last recession, Krispy
Kreme Doughnuts Inc. (KKD) and Jamba Inc. could be next on the menu.
Acquisitions of U.S. restaurant, tea
and coffee companies from Peet’s Coffee & Tea Inc. to Teavana Holdings Inc.
reached $6.1 billion last year, the highest level since 2008, according to data
compiled by Bloomberg. Deals are on the rise as sales growth at coffee and
snack shops are forecast to outpace fast- food chains through 2017, data from
IBISWorld Inc. show. Since Joh. A. Benckiser Group announced plans Dec. 17 to
buy Caribou Coffee Co., Krispy Kreme shares have climbed 21 percent to the
highest in more than five years as Jamba rose 19 percent.
Krispy Kreme, which introduced a new
coffee lineup in 2011, and Jamba (JMBA), the smoothie maker projected to
post its first profit since 2005 this year, may be targeted for their
well-known brand names and the chance to expand into grocery and mass retail
stores, said B. Riley & Co. and Pacific Management Consulting Group. Even
after Krispy Kreme shares climbed 43 percent in a year, the doughnut seller
still trades at a lower earnings multiple than 97 percent of U.S. restaurants
valued at more than $100 million, data compiled by Bloomberg show.
“They’re iconic brands and it takes
forever to build that brand equity,” Conrad Lyon, an analyst at Los
Angeles-based B. Riley, said in a telephone interview. “To be able to write a
check and add that to your portfolio is probably pretty attractive.”
Takeover Wave
Brian Little, a spokesman for
Winston-Salem, North Carolina-based Krispy Kreme, and Matt Lindberg, a
spokesman for Emeryville, California-based Jamba, declined to comment on
takeover speculation.
In addition to its pending $340
million purchase of Caribou, Benckiser also acquired Peet’s last year for about
$1 billion. Starbucks (SBUX) Corp.’s approximately $620 million
takeover of Teavana was disclosed in November and completed last week.
Those acquisitions helped push
industry takeovers last year to the highest since 2008, when deals peaked at
$7.5 billion before consumers curbed spending amid the longest U.S. recession
since the Great Depression, data compiled by Bloomberg show.
Sales at coffee, hot-beverage and
doughnut chains are outpacing fast-food revenue as on-the-go consumers shift to
snacks instead of full restaurant meals, according to June and July reports
from IBISWorld. Coffee and snack shop sales are forecast to increase 4 percent
annually to $33.9 billion in 2017, compared with growth of 1.9 percent a year
for fast-food chains, the Santa Monica, California-based researcher said.
Jamba Juice
Acquirers may be interested in a
coffee or beverage chain with a brand that is “strong in the consumer mind,”
Lyon at B. Riley said. The profit margin for selling beverages is higher than
for food, he said.
“Two brands out there that are
largely the strongest in their category are Krispy Kreme for doughnuts and
Jamba for smoothies,” Lyon said.
Jamba, operator of the Jamba Juice
chain, sells hummus-and- cheese wraps, flatbreads and frozen yogurt
alongside its signature fruit smoothies. The juice maker, founded in 1990, also
sells smoothie kits and 90-calorie energy drinks at Wal- Mart Stores Inc. and Target
Corp. (TGT) locations in the U.S.
While Jamba shares rose 71
percent last year as the company announced new store openings and started
selling more food, the closing price of $2.48 last week was still 80 percent
below its 2006 peak. The company has a market value of $192 million.
Starbucks
Interest
“Jamba juice could be pick-up-able,”
said John Gordon, a San Diego-based principal at restaurant adviser
Pacific Management Consulting, with clients including Dunkin’ Donuts
franchisees. “It would be relatively cheap from a strategic acquisition
standpoint. They already have a very large store presence. It’s already a brand
name.”
The company could fetch about a 15
percent premium in a sale, Gordon estimated.
Jamba is projected to post a profit of
$7.3 million this year following losses since 2005, analyst estimates compiled
by Bloomberg show. After three consecutive years of declining sales, the
company also may report revenue gains of 2 percent for 2012 and 6.3 percent
this year, the estimates show.
Starbucks may seek to buy Jamba if
its Evolution Fresh juice brand, purchased in 2011 for $30 million,
doesn’t catch on fast enough, said Lyon. There are four Evolution Fresh shops
that sell items including spiced carrot juice, mango smoothies and eggs
scrambled with brown wild rice. Jamba has about 755 stores in the U.S., of
which 301 are company owned, according to the company’s November earnings
statement.
Breakfast Foods
“It’s maybe a great opportunity for
Starbucks if they really want to get into that smoothie business and juice
business more,” he said.
Zack Hutson, a spokesman for
Seattle-based Starbucks, declined to comment on whether it’s interested in
buying Jamba.
Krispy Kreme, founded in 1937, may
lure bids from other eateries looking to boost morning food and drinks sales
with its cult-like following, Lyon said.
Wendy’s Co. (WEN) may look at
Krispy Kreme as a way to boost its breakfast sales, Lyon said. The Dublin,
Ohio-based chain, which sells chicken biscuits and home-style potatoes at some
locations, has struggled to compete with McDonald’s Corp.’s morning menu. The
$1.86 billion company backed off testing breakfast in some U.S. markets last
year after a disappointing financial performance.
Coffee Appeal
“Most fast-food restaurants in the
burger category have a huge opportunity in the breakfast arena,” Lyon said.
Krispy Kreme is a “great way to expose customers to products in the morning --
and then later in the afternoon, the burgers take over.”
Bob Bertini, a spokesman for
Wendy’s, said the company doesn’t comment on speculation.
Krispy Kreme, which began selling a
new line of “signature” coffees in 2011, has said it plans to increase coffee
to about 12 percent of sales by the end of fiscal 2015. Coffee currently
accounts for about 4 percent of sales, the company said in August.
Part of the allure of purchasing
coffee companies now is that coffee-bean prices have been falling, Sharon
Zackfia, an analyst at William Blair & Co. in Chicago, said in a phone
interview. Coffee prices dropped 37 percent in 2012, the biggest annual
decrease since 2000, according to data compiled by Bloomberg.
Profit Return
Krispy Kreme returned to profit in
fiscal 2011 after six straight years of losses, data compiled by Bloomberg
show. Earnings for the third quarter topped analysts’ estimates, and
the company said that in the fiscal year ending Jan. 31 it will earn more than
previously thought. Krispy Kreme has a net cash position of $24
million, the data show.
“It’s still a very recognized
brand,” Gary Bradshaw, a Dallas-based money manager at Hodges
Capital Management Inc., which oversees about $800 million including Krispy
Kreme shares, said in a phone interview. “The company has returned to
profitability. They really cleaned up their balance sheet. It could certainly
be bought.”
While the improvements sparked a 48
percent stock gain since the Nov. 19 earnings report, Krispy Kreme
still trades for 5 times its trailing 12-month profit. That’s a lower
price- earnings ratio than 97 percent of U.S. restaurants larger than $100
million, the data show. Only Denny’s Corp. (DENN) is cheaper at 4.5
times.
Doughnut
Calories
“It’s not dirt cheap, but it’s an
improving picture that we think will continue to get better,” Bradshaw said.
“There’s not a lot you can do if someone comes in and offers $15 a share for
the company, but we think if they continue to grow, it could be worth a lot
more than that a couple of years out.”
Krispy Kreme shares rose almost 11
percent to $11.15 on Jan. 4, giving the company a market value of $727 million,
after Alton Stump, an analyst at Longbow Research, initiated coverage with a
buy rating and $15 stock price estimate.
Still, the iconic doughnut’s
nutritional drawbacks may give a possible buyer pause, said Jason Moser, an
Alexandria, Virginia-based analyst at the Motley Fool. A glazed doughnut with
creme filling has 350 calories, according to the company’s website. That’s
why Krispy Kreme has recently introduced oatmeal and fruit juice to its menu.
While Nick Setyan, a Los
Angeles-based analyst at Wedbush Inc., says strategic buyers may be lacking for
Krispy Kreme, he also said the company is a potential buyout candidate for a
private-equity firm at as much as $13 a share. That would be a 17 percent
premium.
“You can capture the future growth
at this point,” Setyan said. “A lot of the sort of bad news is behind them
now.”
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To contact the reporter on this story: Leslie Patton in
Chicago at lpatton5@bloomberg.net;
Tara Lachapelle in New York at tlachapelle@bloomberg.net.
To contact the editor responsible for this story: Sarah
Rabil at srabil@bloomberg.net;
Robin Ajello at rajello@bloomberg.net.