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Krispy Kreme gets sweet deal from 'Budweiser of coffee': Gadfly

[NEW YORK] What goes great with a cuppa Joe? A tasty doughnut.  

JAB Holdings, which swallowed the Keurig Green Mountain coffee company in March, is now scoffing down Krispy Kreme Doughnuts in a US$1.35 billion transaction announced Monday morning. At US$21 a share, the price is 25 per cent higher than Krispy Kreme's average closing level over the past 20 trading sessions. 

It's a sweet deal - unless, of course, you're one of the traders that began shorting Krispy Kreme last month. Short interest had surged to nearly 6 per cent, the highest in a year, after the shares staged a rally despite the company having reported disappointing fourth-quarter sales. The takeover is likely causing a mini-squeeze. 

The deal comes little more than a year after the doughnut chain eliminated the takeover-defense mechanism it adopted in 2013. Getting rid of it faintly signaled to shareholders and potential suitors that it was open to being bought. But at the time, the speculation was that Jollibee Foods would be the buyer because the Philippine restaurant operator had said it was planning to team up with a financial partner to acquire a US-based fast-food company with a market value of at least US$1 billion. It still hasn't done so.

Is there enough glaze on JAB's offer? On the one hand, Krispy Kreme just posted one of its worst same-store sales figures since 2009, and its earnings forecast for this year is below analysts' expectations. And while the offer is higher than where Krispy Kreme's shares traded over the past year, five of six analysts tracked by Bloomberg predicted the stock would climb to US$21 or higher on its own this year. 

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That said, JAB is paying about 19 times Krispy Kreme's trailing 12-month Ebitda (or 16 times the consensus estimate for this year), which may be too rich a multiple for other financial buyers to top. The deal also probably makes the most sense for JAB, which wants to be the Budweiser of coffee, as Pablo Zuanic, an analyst for Susquehanna, put it in December when the Keurig deal was announced. Over the years, JAB has also taken control of Peet's Coffee & Tea, bagel company Einstein Noah Restaurant Group, Caribou Coffee and Jacobs Douwe Egberts. 

Krispy Kreme shares were trading Monday only 5 cents shy of the takeover price, as investors were hesitant to bet on a competing bid. Instead, they should be thinking about what JAB could crave next. Dunkin' Donuts, anyone? 


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