Will Keurig's (GMCR) Decision to Go Private Aid the Stock?

On Dec 28, 2015, we issued an updated research report on Keurig Green Mountain, Inc. GMCR. The recent buyout of this coffee machine maker has stirred the beverage sector.

Keurig agreed to sell itself on Dec 8 to an investor group led by a Luxembourg based private company, JAB Holding Company (‘JAB'), for $13.9 billion, pushing its share price up 72%. The deal, expected to close in the first quarter of 2016, seems to be quite attractive for Keurig, as it will offer significant cash value for its shareholders, who have seen the stock fall nearly 61% since the beginning of the year. After the closure of the deal, Keurig Green Mountain will be privately owned and will continue to operate independently. The agreement has been unanimously approved by Keurig's board. The Coca-Cola Co. KO, which owns a minority stake of 17% in Keurig Green Mountain, also approved the transaction.

Keurig Green Mountain is best known for its single-cup at home coffee maker machines. The company has entered several strategic agreements with other coffee and beverage companies like Unilever plc, Eight O Clock, Starbucks Corporation and Dunkin Donuts DNKN to offer the signature drinks of these companies in Keurig Green Mountain's K-Cups and Vue packs.

In the second half of 2015, Keurig introduced the K200 brewing series to the Keurig 2.0 family. Then in September, Keurig launched a single-cup cold carbonated beverage maker Keurig KOLD -  the first beverage system that allows consumers to freshly make a wide range of cold sparkling and still beverages at home. It also makes popular beverage brands from The Coca-Cola Company and Dr Pepper Snapple Group DPS.

The company has also taken up a multi-year productivity program to reduce structural costs and streamline organization structures to drive efficiency. The program is expected to generate approximately $300 million in savings over the next three years with approximately $100 million of savings in fiscal 2016.

However, Keurig has been posting weak results and witnessing sluggish growth for quite some time. Keurig has suffered from waning sales because of increased competition and slower-than-expected adoption of its newer 2.0 brewing machines, primarily due to consumers' confusion over which brands could be used with the devices. Reportedly, the rollout of the cold brewer Keurig KOLD has also been slower than expected. A stronger dollar has been hampering international sales. In such a scenario, the plan to go private seems a good decision.

Keurig Green Mountain carries a Zacks Rank #3 (Hold).

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