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George Clooney, front man for the perfect espresso in European Nestlé ads, couldn't have handled matters more smoothly. Two weeks after coffee company D.E. Master Blenders told investors that a €7.6-billion ($10-billion) bid might be forthcoming from a private investor group led by J. A. Benckiser (JAB), the cash offer has materialized, with board backing secured.
The price has dropped slightly, from a mooted €12.75 to €12.50 a share, but was dismissed by DE chairman Jan Bennink as the cut and thrust of negotiation. In fact, the only ripple in this apparently smooth blending was comments in the Dutch press by former DE boss Michael Herkemij. These suggested that, within months of DE's summer spinoff from Sara Lee, management was being pushed to sell the business. Mr. Bennink disputes this.
Logically, investors in DE should not care too much. Their decision should be simple: is €12.50 a fair price for the shares? On standard valuation measures, it is hard to say no. The bid price gives an enterprise value to 2013-14 consensus earnings before interest, tax, depreciation and amortization ratio of over 15 times – well above the 10 to 12 multiple for larger, more diversified consumer groups, like Nestlé or Unilever. The bid price is also 25 per cent higher than DE shares ever reached in their brief independent existence.
That said, it can be annoying to sell an asset for what seems a good price, only to watch the buyer make even more money from it short-term. So suspicious investors may wonder whether JAB is muscling in just as DE – shorn of Sara Lee's shackles – is poised to take off. But even that seems questionable.
Margins in the non-European retail business have been dragged down by Brazil, a very fragmented market and not a quick fix. And there are limits to how fast packaging and product innovation can drive organic growth in the higher-margin markets of western Europe. True, cost savings and lower green coffee prices will help. But even if DB's EBITDA reaches €570-million by 2014-15 – more than a third higher than the likely result this year – the EV multiple at the bid price is 13.5 times. JAB, which talks of a 10-year return horizon, has included a high 95-per-cent acceptance level. At this price, it deserves to get there.