Why is the coffee war so hot?

Green Mountain is upping its bid for Diedrich Coffee, but why is the battle so heated? It's all about the K-Cups.

By TheStreet Staff Dec 2, 2009 3:22PM

TheStreet.comBy Jeanine Poggi, TheStreet.com

 

The battle for Diedrich Coffee heated up after Green Mountain Coffee Roasters sweetened its bid today.

 

Green Mountain offered to pay up to $290 million, or $35 a share, significantly higher than Peet's Coffee & Tea's bid of $32.50 a share.

 

The revised agreement also includes a termination fee of $8.5 million to $11.5 million. If the deal is terminated by either party, the fee will be payable to Diedrich, depending on the circumstances.

 

Bing: More on Diedrich Coffee

 

Peet's has until Monday to come up with a better offer.

 

What's the allure of Diedrich? Stifel Nicolaus analyst Steve West says it's all about the cups: "The K-Cup business is a high-growth industry, surging up to 70% over the last several years."

 

K-Cups, of course, are coffee packs used in single-cup brewing systems. Green Mountain owns the licensing rights for K-Cups, which means anyone else who makes them has to pay royalties to Green Mountain. By acquiring Diedrich, Green Moutain would expand its share of the K-Cup market to 85%.

 

Peet's has remained on the sidelines when it comes to K-Cups, West says, because it's waiting for technology to improve. Now, management wants a piece of this lucrative business.

 

"Peet's has the ability to grow Diedrich two to three times over the next several years," West says. The coffee retailer could immediately bring Diedrich into grocery stores and eventually introduce its own Peet's K-Cups.

 

So ultimately who will win this coffee battle?

 

"Peet's won't overpay," West says. "I don't think they will match the offer."

 

Instead, they are raising anti-trust concerns against Green Mountain, which will most likely delay the deal if Green Mountain is selected by Diedrich.

 

Related Articles

 

Diedrich prefers new Green Mountain bid

 

Coffee's weird war yields no winners

 

Analyst boosts rating on Starbucks shares 

 

 

 

 

 

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