Mondelez Combines Coffee Business With D.E. Master Blenders -- 3rd Update

Michael Calia

     Mondelez International Inc. on Wednesday said it plans to combine its coffee business with

privately owned D.E. Master Blenders 1753 B.V. to create a new company that will present a more

formidable challenge to Nestle SA, the world's top coffee company.

     Mondelez shares jumped about 8% in early trading Wednesday as the food products giant also

unveiled a $3.5 billion restructuring program while reporting first-quarter earnings that topped

analysts' expectations.

     The new company--called Jacobs Douwe Egberts--will be based in the Netherlands and is expected

to have annual revenue of more than $7 billion, the companies said. Mondelez and D.E. Master

Blenders boast strong coffee market positions throughout Europe and emerging markets such as China

and Brazil.

     Mondelez is the world's second-biggest coffee company by sales, with D.E. Master Blenders

coming in third. Along with Nestlé, the three companies recently controlled about 40% of the

world's coffee market, and Nestlé is likely to remain at the top even after the creation of Jacobs

Douwe Egberts. Recently, Nestlé's share of the global market was 23%, according to Euromonitor

International estimates.

     The tie-up will create a stronger competitor for the Swiss food giant. Nestlé's Nescafe brand

dominates the instant coffee space and is one of Nestlé's biggest businesses, while the company's

Nespresso capsule business leads the premium segment. Jacobs Douwe Egberts, likewise, will pose a

bigger challenge for Nestlé in instant and capsule coffee, said Jon Cox, an analyst at Kepler

Cheuvreux in Zurich. "The new company would have deeper pockets for marketing, research and

development, as well as more muscle with retailers," he said.

     The deal could also allow a combined coffee company greater ability to secure better prices and

quantities of coffee beans, said Ross Colbert, a managing director and a beverage analyst at

Rabobank.

     The agreement was announced as coffee prices are soaring due to a record drought in Brazil.

Arabica coffee beans--the world's most widely sowed and consumed variety--have soared more than 80%

this year after dry weather hurt coffee trees and stunted the development of Brazil's crop, which

growers have recently started to pick. Brazil is the world's largest grower of coffee and creates

around one-third of global annual output, and analysts expect competition for beans to be high this

year. Such supply issues would be easier to negotiate for a large company, Mr. Colbert said.

     Nestlé doesn't break down its sales by brand, but coffee is estimated to make up around

three-quarters of its powdered and liquid beverage product business, which had sales of 20.5 billion

Swiss francs ($23.4 billion) in 2013.

     Nestlé executives have noted the coffee market has become more competitive in recent years due

to the rise of local roasters as well as traditional companies like Mondelez, and have responded by

expanding into nontraditional coffee drinking markets like China, and Japan.

     Nestlé has also been rolling out new localized versions of coffee such as instant coffee with

cardamom to appeal to local tastes in the Middle East. It has also introduced 3-in-1

packages--combining instant coffee, sweetener and creamer--that do particularly well in developing

countries.

     D.E. Master Blenders--which was spun off from Sara Lee Corp. in 2012 and was bought last year

by investment group Joh. A. Benckiser for nearly $10 billion--owns a slate of brands including Douwe

Egberts and Pilao. The Deerfield, Ill.-based Mondelez--which split from Kraft Inc. in 2012 and is

best known for making snack brands such as Oreo cookies and Ritz crackers--owns coffee brands such

as Jacobs and Gevalia.

     As part of the deal, Mondelez will receive about $5 billion in cash and own a 49% equity

interest in the new company.

     Prodded by investor Nelson Peltz, who joined the Mondelez board earlier this year after

increasing his stake in the snack maker, the company has sought to contain costs recently. The

coffee deal will allow the company to further cut back on its supply chain and overhead costs,

finance chief Dave Brearton said. The company expects the new restructuring plan to generate at

least $1.5 billion in savings by 2018.

     Input costs declined 1.2% in the first quarter, Mondelez said, while selling, general and

administrative expenses fell 2.9%.

     Mondelez, meanwhile, cut its full-year outlook for organic net revenue growth to 3% from 4%, as

weakness in emerging markets and lower coffee prices have squeezed the company's top line.

     "While we expect the pass-through of higher green coffee costs will benefit top-line growth as

the year unfolds, we anticipate that the challenging environment in emerging markets will continue

and that we may realize some disruptions as we implement our strategic initiatives," Mr. Brearton

said. "As a result, we expect revenue growth to improve modestly in the second half."

     Overall, Mondelez posted a 70% decline in net profit for the quarter, reflecting a jump in

interest and other expenses in the period.

     The company reported $163 million, or nine cents a share, in profit, compared with $536

million, or 30 cents a share, a year earlier. On an adjusted basis, which excludes restructuring

charges and debt-related expenses, per-share earnings rose to 39 cents from 35 cents.

Revenue slipped 1.2% to $8.64 billion.

     Analysts surveyed by Thomson Reuters had projected per-share earnings of 35 cents and revenue

of $8.64 billion.