A Coffee Firm Merger Aimed At Starbucks (SBUX)

Two coffee companies which sell their products online and through retailers are merging. They should be able to create a formidable competitor for Starbuck’s  retail business outside its own stores. Diedrich (NASDAQ:DDRX) will be bought by Peet’s NASDAQ:PEET) for $26 a share or $213 million. The consideration is well above Diedrich’s current price of just over $20.

Diedrich sells it single serving products and beans through restaurants, stores, and coffeehouses. Peet’s sells coffee and tea through restaurants and food services establishments and also sells coffee and tea makers. Neither firm has a chain of stores like Starbucks does, but each competes with the Starbucks branded coffees sold in grocery stores and super markets.

Coffee is hot again. Diedrich’s stock price is up almost 100% over the last six months. Starbucks is up 40% and Peet’s has risen 30% during the same period. Coffee sales may be a leading economic indicator, or at least that is what Wall St. thinks. The increase in stock prices at the three companies anticipates strong earnings for the third and fourth quarters.

The coffee industry is crowded, but that may not hold true at the high end of the sector. McDonald’s (NYSE:MCD) and Dunkin’ Donuts may have been able to pick up significant market share in the business of selling coffee though their store chains and this has hurt Starbucks. The market for selling coffee through restaurants and grocery stores is another business entirely. Peet’s has gotten good grades from Consumer Reports and at over $14 per pound it is one of the most expensive brands available in the US.

Peet’s and Diedrich are both solidly profitable. Peet’s made $5.3 million in the June quarter on $73.5 million in revenue. Diedrich made $1.8 million on $15.4 milion in revenue. Neither company is big on its own but together they represent one more challenge to part of Starbucks line of businesses.

Douglas A. McIntyre