Global Glance: May 16, 2016
A quick look at intriguing international stories
By John Bostwick, Managing Editor, Radius
Sweet M&A Announcement: Krispy Kreme to Be Acquired by Luxemburg Investment Group
Last Monday, North Carolina-based Krispy Kreme Doughnuts Inc. announced it had entered into a “definitive merger agreement” with JAB Holding Company, a privately held investment group based in Luxemburg. According to the release, the deal is valued at $1.35 billion, a premium of about 25% over Krispy Kreme’s stock price at the time.
Looked at one way, JAB’s planned acquisition is brilliant. Krispy Kreme’s press release notes that, among other holdings, JAB’s portfolio includes controlling stakes in at least five coffee concerns, including Keurig Green Mountain and Peet’s Coffee & Tea. And since few of life’s culinary pleasures can match a good doughnut and coffee pairing, it makes perfect sense for JAB to complement its growing java empire with the company that makes (in my opinion) the world’s most delicious mass-produced doughnut, the original glazed. Dunkin’ Donuts may currently dominate my home region of New England, but I for one would pass many a Dunkin’ to have a Krispy Kreme original glazed and a Peet’s coffee.
As it stands now, I’d have to drive hours to reach a Krispy Kreme, which according to The Boston Globe closed its New England stores “in the early 2000s.” That same Globe article, published before last week’s acquisition announcement, notes that Krispy Kreme is attempting to make a comeback in the region. Krispy Kreme’s February press release about the New England strategy notes that the company is “expanding its development efforts throughout the United States” and that “there are currently almost 300 shops located in 41 states nationwide.”
Given the almost ludicrous deliciousness of Krispy Kreme’s flagship product (that original glazed), and the fact that the company’s been around since the 1930s, it’s remarkable that it doesn’t have more US locations than those “almost 300 shops.” It’s pretty clear that JAB is betting on the global potential of the original glazed to justify its $1.35 billion purchase.
Even before the acquisition announcement, Krispy Kreme had set its own sights on growing through international expansion. A Wall Street Journal article from March indicated that the company added 115 international stores last year (a 14% increase, according to the Journal), and “now expects to open 120 to 140 international stores, up from its earlier view of about 100 international franchise shops.” JAB’s announcement about the acquisition highlights Krispy Kreme’s global locations, noting that today there are “over 1,100 Krispy Kreme shops in more than 26 countries around the world.”
Because many in the US don’t have access to Krispy Kreme in their home states, the company’s strong international presence and brand may come as a surprise to some. But that brand — including its vintage-Americana logo and hallmark “hot now” store lights indicating fresh doughnuts — was clearly a big factor in the acquisition; JAB senior partner Peter Harf called it “iconic” in JAB’s announcement. (The picture below, by the way, shows me and my daughter in 2012. We were on vacation in Savannah, Georgia, and when I passed a Krispy Kreme I knew I had to introduce my Massachusetts kids to the glories of the original glazed and document the experience.)
Interestingly given its other holdings, JAB almost certainly isn’t looking to acquire Krispy Kreme for its coffee, which is neither renowned nor very profitable. A New York Times article last week noted that coffee “makes up only about 5 percent of Krispy Kreme’s sales,” whereas “beverages at its archrival, Dunkin’ Brands, account for around 60 percent of revenue.” That article points out that “selling cups of joe is more profitable than hawking doughnuts,” which goes a long way towards explaining why Dunkin’ has been so much more financially successful than Krispy Kreme despite selling what I think most will agree are inferior doughnuts. The Times indicates that “Krispy Kreme’s operating margin is just 10 percent compared with nearly 40 percent at Dunkin’.” JAB obviously sees an opportunity to close that gap.
The Wall Street Journal covered the JAB acquisition on the front page of last Tuesday’s Business & Tech section, noting that at least some of Krispy Kreme’s recent business struggles arose from regulatory problems: “Once famous for the long lines it drew when it opened a new store, the chain nearly imploded in the mid-2000s after it grew too quickly, took a hit from low-carb diets and endured a Securities and Exchange Commission investigation into its accounting practices.”
The SEC investigation began in 2004 and was settled in 2009. A CFO.com article reported that the SEC charges claimed three former Krispy Kreme executives were “instrumental in inflating earnings of the then-fast-growing restaurant chain in an alleged scheme designed to boost their compensation.” The three individuals “agreed to give up money that the SEC alleged they illegally made, and also agreed to pay civil penalties, and consented to be permanently enjoined from future violations “
These regulatory troubles were not enough to put off JAB, of course. Nor apparently does JAB plan to seize the reins of Krispy Kreme’s operations, at least for now. Its announcement last week indicates that “Krispy Kreme will be privately owned and will continue to be independently operated from Krispy Kreme’s current headquarters in Winston-Salem, NC.”
Not all announced M&A deals go through, of course, as we were reminded last month when Pfizer and Allergan terminated their planned merger by mutual consent. That deal was terminated due to regulatory changes that greatly reduced the originally anticipated tax benefits of the merger. The New York Times article quoted above mentions that the planned JAB acquisition may be derailed for another reason: “Krispy Kreme may prove too appetizing for others to pass up without a fight.”