Selling JAB Holding’s coffee through Krispy Kreme Doughnuts’ outlets may give a needed jolt to the chain’s profit
The deal for Krispy Kreme Doughnuts may require more sweetener.
JAB Holding Company has added a 25 percent premium to its $1.4 billion offer to take the Krispy Kreme chain private. JAB, the billionaire-backed owner of Keurig Green Mountain, Peet’s Coffee & Tea and other coffee brands, should be able to raise sales and margins. But Krispy Kreme may prove too appetizing for others to pass up without a fight.
Krispy Kreme is a natural fit for JAB, which, backed by the billionaire Reimann family of Germany, controls one of the world’s biggest packaged-coffee businesses through its 51 percent stake in Jacobs Douwe Egberts. It is also a giant in single-serve coffee because of its $14 billion purchase of Keurig last year.
Selling JAB’s coffee through Krispy Kreme outlets could give the doughnut maker’s sales and margins a needed jolt. Selling cups of joe is more profitable than hawking doughnuts, yet it makes up only about 5 percent of Krispy Kreme’s sales. Beverages at its archrival, Dunkin’ Brands, account for around 60 percent of revenue.
Krispy Kreme also has a higher percentage of company-owned locations than some competitors. These are less profitable than franchised restaurants.
Krispy Kreme’s operating margin is just 10 percent compared with nearly 40 percent at Dunkin’. That helps explain why Krispy’s shares trade at just over 18 times expected earnings over the next 12 months, while Dunkin’ and other fast-food competitors tracked by Thomson Reuters trade on an average closer to 23 times.
JAB’s $21-per-share offer would just close that gap. Covering the $280 million premium that JAB is offering through cost savings alone would require immediately eliminating $46 million — or 11 percent — of Krispy Kreme’s annual direct operating expenses, using the company’s 40 percent effective tax rate and a multiple of 10 times earnings. Rivals or even private-equity firms may think they could do better — while getting their hands on an iconic brand with no net debt and a clear path to higher margins.
That may still leave JAB at the front of the line. The deal is one of those rare ones in which there is real potential to increase revenue both at home and internationally, by speeding expansion under the JAB umbrella. That means the deep-pocketed acquirer should be able to inject more sweetener into its offer.
