Commentary

JAB Putting A Lot Of Dough Into Krispy Kreme

Krispy Kreme, the global hot glazed-doughnut purveyor founded in 1937 in Winston Salem, N.C., on the premise that “customers are the center of the doughnut,” is being acquired by JAB Beech, a subsidiary of the Luxembourg-based JAB Holding Co., and minority investor BDT Capital Partners, for about $1.35 billion cash — the price you pay for a sugar-laden icon.

“For nearly 80 years, our iconic brand has been touching and enhancing lives through the joy that is Krispy Kreme,” chairman Jim Morgan says in a statement announcing the transaction. “This transaction puts us in the best possible position to continue to spread that joy to a growing number of people around the world while delivering significant value to Krispy Kreme shareholders,” namely, $21 per share. Headquarters will remain in Winston-Salem.

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“We are thrilled to have such an iconic brand as Krispy Kreme joining the JAB portfolio,” says Peter Harf, senior partner at JAB. Its lineup includes single-serve coffee and beverage maker Keurig Green Mountain and Jacobs Douwe Egberts, the largest pure-play consumer coffee company in the world. It also has controlling stakes in Peet's Coffee & Tea, Caribou Coffee Company, Einstein Noah Restaurant Group, the quick-casual chain based in Denver, and Espresso House, the largest branded coffee shop chain in Scandinavia. It also owns Coty, with brands such as Jimmy Choo, Bally and Belstaff under its umbrella, and has a minority interest in health, hygiene and home products marketer Reckitt Benckiser (Lysol, Scholl, Woolite).

JAB, formerly called Joh. A. Benckiser, “manages the money of the Reimann family, one of Germany’s wealthiest,” write Erik Holm and Maureen Farrell for the Wall Street Journal, in an exploration of its holdings.

Krispy Kreme, which Vernon Rudolph founded in 1937 after buying a secret yeast-raised doughnut recipe from a New Orleans French chef, “is most famous for its glazed doughnut, but it also sells a wide assortment of other flavors such as lemon-filled and sour cream. More recently, the company has made coffee a priority with new offerings and promotions,” writes Leslie Picker for the New York Times.

“Coffee also happens to be the key ingredient in JAB’s other recent acquisitions,” Picker continues. “JAB’s portfolio makes it the ‘near-ideal candidate’ to control Krispy Kreme, Will Slabaugh, an analyst at Stephens, said in a research note on Monday. JAB would be able to improve Krispy Kreme’s operations, add food and beverage options, and help it expand nationally and internationally, he said.”

Krispy Kreme has been “chugging along” since going public in 2000, when investors “ate up its stock,” Sarah Halzack reports for the Washington Post, with some bumps and sell-offs along the way. It’s “facing some headwinds” with 824 of the chain’s 1,121 stores overseas hurt by the strength of the U.S. dollar.

“Back at home, it is trying to steer away from the promotions it has heavily relied on to lure customers in a highly competitive quick-service dining environment,” Halzack writes. “And, perhaps most important, Krispy Kreme might be bumping up against the limits of a strategy that relies so heavily on its signature pastry.”

“Krispy Kreme’s issue is that they’re a one-trick pony,” Nation’s Restaurant News’ Jonathan Maze tells her. “They’re beholden to people’s demand for doughnuts.” But “if anybody outside of Seattle can get Krispy Kreme to sell more coffee, it’s JAB,” Maze blogs for NRN after pointing put that it’s “not getting its doughnuts cheap” — a 25% premium over Krispy Kreme's closing price on Friday and about 19 times trailing earnings before EBITDA. 

“Krispy Kreme has been trying to bolster its coffee business as a way to attract customers who might not want doughnuts. The company has launched new coffee drinks and what it calls edible coffee treats, such as cappuccino and caramel macchiato-flavored snacks,” write Julie Jargon and Mike Esterl for the Wall Street Journal.

It’s in a highly competitive market, of course, including not only Starbucks and Dunkin' Donuts but also the Canadian-based Tim Hortons, they point out. The latter, acquired by the Brazilian private-equity company 3G Capital Partners last year, is making moves in the U.S. market.

Despite the premium price JAB is willing to pay, Reuters Breakingviews columnist Kevin Allison suggests “Krispy Kreme may prove too appetizing for others to pass up without a fight.” But look for JAB to battle back, if that happens. “It is one of those rare deals where there is real potential to boost revenue both at home and by speeding international expansion under the JAB umbrella. That means the deep-pocketed acquirer should be able to inject more jam into its offer.”

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