22 Jan

Mondelēz’ proposed merger sparks European antitrust probe

WRITTEN BY Samantha Nielson FEATURED IN Active Management: Mutual Funds, Closed-End Funds, Hedge Funds

Mondelēz’s joint coffee venture could challenge market leader Nestlé

Last year, Mondelēz International (MDLZ) agreed to combine its coffee portfolio with D.E. Master Blenders 1753 B.V. (DEMBF) (DEMB) to create a new coffee company called Jacobs Douwe Egberts (JDE). The new combined entity will be the world’s leading pure-play coffee company with annual revenues of more than $7 billion and an EBITDA (earnings before interest, taxes, depreciation, and amortization) margin in the high teens. The deal will enable Mondelēz (MDLZ) to focus on its snacks business.

Mondelēz’ proposed merger sparks European antitrust probe

In the deal, Mondelēz will receive cash of around $5 billion and a 49% stake in Jacobs Douwe Egberts. Acorn Holdings B.V., owner of D.E. Master Blenders 1753 B.V., will hold a majority share in the venture. Acorn Holdings B.V. is owned by an investor group led by JAB Holding Company, which is the investment arm of the billionaire Reimann family of Germany.

The deal will combine the world’s second- and third-largest coffee players behind market leader Nestlé (NSRGY). The two companies own some of the world’s leading coffee brands, such as Jacobs, Carte Noire, Gevalia, Kenco, Tassimo, and Millicano from Mondelēz International and Douwe Egberts, and L’OR, Pilao, and Senseo from D.E. Master Blenders 1753 B.V. Jacobs Douwe Egberts will also “have a strong emerging market presence, giving it significant revenue synergy opportunities in the $81 billion global coffee category.”

European antitrust probe on merger

Last month, European antitrust regulators initiated an in-depth investigation into Mondelēz’ proposed merger on concerns of reduced competition. A statement said the merger will “significantly reduce competition for roast and ground coffee in France, Denmark and Latvia, as well as for filter pads in France and Austria.”

The regulators also noted, “The proposed transaction also reduces the number of key players in single-serve systems. The deal would bring together DEMB’s Senseo and Mondelez’s Tassimo systems, which are two of the four leading systems in Europe (being the other two Nestle’s Dolce Gusto and Nespresso).” Single-serve formats allow consumers to make one cup of coffee at a time at the push of a button.

The regulators noted concerns that the deal “would lead to higher prices for customers of machines and consumables and to less innovation.” In the United States, according to a May Bloomberg article, Keurig Green Mountain (GMCR) controls 85% of the single-serve coffee pod segment. The Coca Cola Company (KO) owns a 10% stake in Keurig Green Mountain (GMCR).

News reports in July noted that both Mondelēz (MDLZ) and D.E. Master Blenders 1753 B.V. (DEMB) are considering options, including a possible divestment of French coffee brands L’OR and Grand Mere. Italy’s Lavazza is believed to have an interest in acquiring the brands.

Coffee represents about 12% of Mondelēz International’s (MDLZ) total company portfolio globally. The business generated $3.9 billion of revenue in 2013.

We’ll find out more about Mondelēz’ (MDLZ) portfolio and earnings in the next part of this series.

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