JAB BUYS KEURIG GREEN MOUNTAIN (GMCR): P.T. BARNUM AND H.L. MENCKEN SHARE A CUP OF JOE …AND A SMILE

12/7/15

The big news in the financial world today was the $92.00 cash offer for Keurig Green Mountain (GMCR) by Germany’s JAB Holdings.   That $92 was a (Get this!) 78% premium to GMCR’s close on Friday.   GMCR traded up $37.19, or 72%, to $88.89 today.   All in all, a great day for people long GMCR, a group that did not include your truly.

I have only a few, and probably not all that consequential, thoughts on the deal, but more salient thoughts on GMCR and its signature product, the Keurig single cup coffee maker. 

On the deal…

·         Until today, the shorts were having a field day with GMCR; at Friday’s close of $51.70, GMCR was down 63% from its 52 week closing high of $139.69, reached just about a year ago.  Maybe the Reimann family, which essentially is JAB Holdings, knows something the existing shorts don’t.  Or maybe the Reimanns just think the stock had fallen too far, partially courtesy of the shorts.   We don’t know what their thought process was.

·         That $92 per share price for GMCR is, according to reports, 15 times earnings before interest, taxes, depreciation, and amortization, or EBITDA.  Fifteen times.  Wow.   Back in the ‘80s when I was a kid working on the buy side of junk bond market and knew everything, we would look at deals with big multiples of EBITDA, but even in those gun slinging days, a 15 EBITDA multiple was considered, er, risky.   And I remember fondly the familiar response of my boss, or, more properly, my boss’s boss, a great man named Bill Buecking, when yours truly would present such deals.   He would read the material, listen to my presentation, lean back, shake his head, and say “We’ve come a long way with these deals…a LONG way.”   Fortunately, Bill’s wisdom often overrode my rookie omniscience and saved us from a lot of bowser deals.

So, no, I don’t know a lot about the specifics of the GMCR deal.  But my experience with such deals, my respect for some of the people who remained short GMCR, and the years that have passed since I was a 20 something at Kemper who knew everything, give me pause.   But I’d sure like to have been long GMCR before the open this morning.

More salient is the suspicions I have had about these single serving coffee makers since their inception.   After doing some quick calculations and discovering that making a single serve Keurig cost about as much per cup as making seven cups of coffee in a Mister Coffee, I wondered who in the world buys these things.   

Keurig marketed this latest bow to the “Gotta have it because my neighbors have it” approach to spending that permeates our society by saying that a Keurig cup is a downright bargain compared to a cup of coffee at Starbuck’s (Note to Keurig:   so is just about any other consumable in the world on a per ounce basis.) or even at Dunkin’ Donuts.   Well, yeah, but you actually have to brew your own coffee with a Keurig.   The far more apt comparison is to a brew your own cup out of a Mister Coffee or even a Melitta coffee maker, if you must.  In that comparison, the Keurig cup gets beat more mercilessly than a hapless opponent of the late Dick the Bruiser.  But don’t tell that to a yuppie in a hurry to spend money he doesn’t have to buy something he doesn’t need in order to impress people he doesn’t like.   But I digress.

So I was heartened this morning as I was listening to Bloomberg Radio on the way to Mass and heard an analyst (Sorry; I didn’t catch his name or employer.) say the following about buyers of Keurigs:

“These are people who turn a four cent cup into a 30 cent cup and pay $100 for the privilege.   So I don’t think price sensitivity is an issue here.”

This insightful young (I presume; I am rapidly approaching, if I haven’t passed, the age at which everyone is young.) man, obviously, was responding to a question regarding price sensitivity and Keurig products and was therefore commenting only on those aspects of the Keurig customer.   Yours truly, however, would apply the same logic, as I have in the past, to other characteristics of the typical Keurig customer.   I was immediately reminded of the insight of P.T. Barnum, who reminded us that there is a sucker born every minute.   But the reiteration this morning by the aforementioned highly compensated analyst of my years ago thoughts on the price “logic” behind a Keurig purchase brought to mind one of the most famous, but most misquoted, musings of one of my heroes, H.L. Mencken, to wit:

“No one in this world, so far as I know—and I have researched the records for years, and employed agents to help me—has ever lost money by underestimating the intelligence of the great masses of the plain people. Nor has anyone ever lost public office thereby.”

I would perhaps limit this observation to the apparent upper strata of society rather than to “the great masses of the plain people,” but the underlying idea is self-evident.

Those who do throw their coffee money away so frivolously will doubtless retort

“Oh, but I like coffee from my Keurig and, after all, I can afford it. ”

…as if that answer should somehow give us comfort about the future of both our republic and our economy given that both are in the hands of many of those who employ such “logic.”   I, and I am sure you, know people who can afford to throw $20 bills off the top of the John Hancock Building and would doubtless have a few laughs doing so.   That makes it a good idea?

So I don’t know if JAB’s purchase of GMCR will work out for JAB.   But for it to work, the American people will have to continue to spend money on highly cost ineffective geegaws, which is a great bet.  Further, however, the growing competition for CMGR’s not all that unique line of products will have to somehow stumble and fail to catch the limited attention span of the type of people who pay seven or eight times a product’s value in order to be trendy and “with it,” a more questionable bet.   Finally, JAB will have to find financing for a 15 times EBITDA deal in an environment featuring rising short term interest rates and a weakening junk bond market.   I suspect I know what Bill Buecking would have said 30 years ago and what yours truly, after having acquired a small measure of Mr. Buecking’s wisdom, would say today.   But since I don’t ply the junk waters any more, I’ll just make myself a 4 cent cup of coffee and leave this deal for the smart kids to ponder.