I Was Painfully Wrong About Keurig Green Mountain – Seeking Alpha

GMCR is breaking the stock market today up 40% as it is currently winning the internet headlines after news that it is being acquired.

I had just opined a few weeks ago to avoid the name due to its volatility and declining key metrics.

I discuss why I made the call, discuss this deal, and why is see it being approved.

Well, Keurig Green Mountain (NASDAQ:GMCR) is ‘breaking the stock market’ today up 40% as it is currently ‘winning the internet headlines’ after news that it is being acquired. On top of that, it is smashing my recommendation to avoid the stock. Well, those avoided missed out on today’s pop. I stand by the reasons why I said the stock was too volatile for me, but of course, I did not see this acquisition coming, at least not so soon after I wrote about the name.

I talked about the struggles that the maker of the famous near instant cup of coffee/tea machine the Keurig with its famous pods were having. I had long avoided the stock because it was so volatile. It has made traders and investors a fortune, but has burned many who were caught on the wrong side of the trade. Competition is a major issue and that was impacting the company.

That said in Q4 the company saw net sales of $ 1.0 billion. That was a beat of $ 10 million versus analyst expectations which is great, but sales decreased 13% versus the prior year period due to declines in brewer sales and pod sales. For the most recent quarter, 1.9 million Keurig hot system brewers were sold. This includes 1.8 million sold by Keurig with 0.1 million reported sold by Keurig’s partners. The problem is that this is a 20% decrease in sales volume. Further there was an approximately 10% decrease in product mix and an approximately 1% decrease due to net price realization. Not good. To make matters worse margins are compressing. This is a huge negative. For the quarter, net gross margin declined 530 basis points to 32.3% of net sales from 37.6% last year. That is pain. I stand by the call I made, but of course, in the end, it’s the wrong call as investors are cashing in now.

So what is the deal here? JAB Holding Company [JAB] announced that it and Keurig Green Mountain entered into a definitive merger agreement under which a JAB-led investor group will acquire Keurig Green Mountain for $ 92.00 per share in cash, or a total equity value of approximately $ 13.9 billion. The agreement, which has been unanimously approved by Keurig Green Mountains Board of Directors, represents a premium of approximately 77.9% over Keurig Green Mountains closing stock price on December 4, 2015. Shares are trading now at about $ 89 a share following the news. But why this acquisition?

Well, JAB is acquiring Keurig Green Mountain in partnership with strategic minority investors. Bart Becht, Chairman at JAB stated:

“Keurig Green Mountain represents a major step forward in the creation of our global coffee platform. It is a fantastic company that uniquely brings together premium coffee brands and new beverage dispensing technologies like the famous Keurig single serve machine. Keurig Green Mountain will operate as an independent entity to ensure it will further build on its coffee & technology strength and continue to serve all its partners to the best of its abilities.”

Perhaps the company will do better privately. That remains to be seen. But what we do know is that management will be staying on and the company will continue to be headquartered in Vermont. Brian Kelley, President and CEO of Keurig Green Mountain said:

“This transaction will deliver significant cash value for our shareholders and offers an exciting new chapter for our customers, partners and employees by combining Keurig Green Mountain with JABs global coffee platform. JAB fully supports Keurig Green Mountains culture and values as we continue to pursue our commitment to deliver innovative beverage solutions for consumers at the touch of a button.”

In the release we learned that The Coca-Cola Company (NYSE:KO) supported this deal. That mattered because they were a significant shareholder. The new collaboration hopefully will help streamline the sales and manufacturing process of GMCR under the umbrella of JAB. Now, the deal isn’t final but is expected to close during the first calendar quarter of 2016, subject to customary closing conditions, including regulatory approvals. As you are probably aware the deal needs shareholder approval, but with the stock having skyrocketed and the support of Coca-Cola, I can’t see this not happening. At the end of the day, this is the right move for the company and its shareholders. While the sector will remain volatile, many investors who have bought in recent months and held on will be rewarded. My call to avoid the stock was data centric. But, at the same time, it caused those who heeded my advice to miss out on this holiday bonus.

Note from the author: Christopher F. Davis has been a leading contributor with Seeking Alpha since early 2012. If you like his material and want to see more, scroll to the top of the article and hit “follow.” He also writes a lot of “breaking” articles, which are time sensitive, actionable investing ideas. If you would like to be among the first to be updated, be sure to check the box for “Real-time alerts on this author” under “Follow.”