JAB to Buy Master Blenders for $9.8 Billion in Biggest Deal

Joh. A. Benckiser, the investment arm of the billionaire Reimann family, agreed to buy D.E Master Blenders 1753 NV for about 7.5 billion euros ($9.8 billion) to build a coffee conglomerate in the industry’s biggest deal ever.

JAB will pay 12.50 euros a share, the companies said in a statement today, less than the price the parties disclosed they were discussing last month. Amsterdam-basedMaster Blenders’ board supports the offer, it said in the statement.

The purchase of the Senseo maker, which was spun off by Sara Lee Corp. last year, will give JAB a platform to expand its coffee business both organically and by acquisition, JAB Chairman Bart Becht said today. JAB agreed to buy U.S.-based coffee chains Peet’s Coffee & Tea Inc. and Caribou Coffee Co. for more than $1 billion in total last year.

While the offer is lower than originally suggested, “it certainly looks like a fair price,” said Jon Cox, an analyst at Kepler Capital Markets in Zurich. “I presume JAB’s idea is to establish a global coffee company, something hybrid between Starbucks and Nestle/Nespresso. Competition will be pretty intense between companies.”

Master Blenders shares fell 0.6 percent to 12.16 euros at 2:01 p.m. in Amsterdam trading. JAB and Master Blenders announced on March 28 that they were in discussions that could lead to a deal at 12.75 euros a share, triggering a 25 percent increase in the stock that day.

The price was “disappointing,” Marco Gulpers, an analyst at ING said today. Gulpers said in a note yesterday he expected a closing price of 13 euros if Master Blenders’ team would fight to “extract the highest value not only for shareholders, but also for other stakeholders.”

Master Blenders interim Chief Executive Officer Jan Bennink today attributed the lower price to due diligence in an interview posted on the company’s website.

“In any due diligence process, there’s a couple of positives, there’s a couple of negatives and in the end, we came to an agreement that 12.50 euros is the correct price,” Bennink said in the interview. The deal gives Master Blenders a total value of 36 times earnings before interest, taxes, depreciation and amortization, according to Bloomberg data. JAB’s purchase of Peet’s valued that business at 22 times Ebitda.

The transaction, which is subject to shareholders controling 95 percent tendering their shares, is expected to be completed at the end of July or beginning of August, Bennink told analysts in a conference call. If the merger falls through, JAB will forfeit a reverse termination fee to Master Blenders of 150 million euros, according to the statement.

Following years of underinvestment when it was part of Sara Lee, Master Blenders has stumbled since it was spun off in June. Accounting errors were uncovered at the Brazilian business, and CEO Michiel Herkemij departed after only 12 months, leaving Chairman Bennink in charge. In February, the company reduced its 2013 sales and profitability forecasts --casting doubt on Bennink’s plan to become the world’s No. 2 coffee company.

Master Blenders “has a very strong management team, fantastic brands, enormous expertise and potential in the coffee and tea categories,” Becht said today. The company intends to use Master Blenders to expand in coffee and tea, he said.

JAB took a stake in Master Blenders last year following the spin-off, saying it was a financial rather than strategic holding. The company had not decided at that point whether it wanted to buy all of the company, Becht said.

“We believed we could pick up the shares at a very interesting price and have a good return,” Becht said. “Our decision to go for the total came much, much later and really came subsequent to a strategic review, which we did at the beginning of this year.”

The offer is fully financed and JAB said it will use a combination of about 3 billion euros in debt and about 4.9 billion euros of equity. The company has fully committed debt financing from Bank of America Corp., Citigroup Inc., Rabobank and Morgan Stanley, it said. The company has also secured equity financing from parties including JAB Forest BV and BDT Oak Acquisition Vehicle.

Master Blenders’ headquarters, research and development, and plant facilities will remain in the Netherlands, JAB said. After the deal is completed, JAB proposes a board to include Becht as chairman, and Peter Harf, Olivier Goudet, Alexandre Van Damme, Byron Trott and Alejandro Santo Domingo as non-executive members.

Lazard Ltd. acted as lead financial adviser to Master Blenders. Goldman Sachs Group Inc. and JPMorgan Chase & Co. also aided the Dutch company. Bank of America Merrill Lynch, Leonardo & Co., BDT & Co. and Rabobank/Rothschild advised Oak Leaf BV, a company owned by a JAB-led investor group, which made the offer. Morgan Stanley and Citigroup advised JAB.