May 19, 2020

Breakingviews: JAB can go further to ease caffeine addiction

by Breakingviews.

Selling coffee is all about identifying the perfect blend. JAB is trying to do something similar with its roster of investments by oking the sale of a 2 billion euro chunk of the world’s second-biggest maker of at-home coffee, JDE Peet’s. To complete its shift from a family office to a fully-fledged consumer goods fund, it should go a bit further.

At-home drinking has helped JDE Peet’s hold its value despite Covid-19. Having 80% of sales derived from coffee to drink at home is an advantage when lockdowns mean there are fewer other places to imbibe. The company has managed to maintain a revenue growth rate similar to last year’s 3% even with many restaurants and cafes shut.

Nestlé, whose sales growth has also remained robust, trades at an enterprise value of 17 times trailing EBITDA, according to Refinitiv data. Applying the same multiple to JDE Peet’s EBITDA of 1.5 billion euros gives the maker of Kenco and Douwe Egberts coffee an enterprise value of around 25 billion euros. The lack of other big initial public offerings this year makes a full-bodied valuation more likely. So does a rotation to pricier coffee options which is likely to persist. Before a Covid-19 vaccine is rolled out, consumers are likely to avoid coffee shops even as they open.

JAB, the Luxembourg-based holding company which started out as the investment fund of Germany’s Reimann family, isn’t selling any of its 75% stake – yet. Instead, the 700 million euros in new shares sold will pay down JDE Peet’s debt, with the rest of the issue representing minority investors selling out. Still, Chief Executive Olivier Goudet can now sell down JAB’s holding with minimal hassle in the future and pivot to potential growth areas like pet care.

Why? Because ratings agencies like S&P reckon Goudet is too concentrated in three big companies. With four-fifths of the value of the portfolio concentrated in JDE Peet’s, Keurig Dr Pepper and cosmetics maker Coty – in which JAB just sold a stake to KKR to help repair the mess after its haircare deal in 2012 – they may have a point. Further stake sales would allow JAB to turn its coffee addiction into longer-term health benefits.


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