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.
