UPDATE 2-Green Mountain agrees to buy Diedrich

Tue Dec 8, 2009 2:37pm EST

* Diedrich accepts Green Mountain's all-cash offer

* Deal to extend Green Mountain's dominance of K-cup market

* Green Mountain pays $8.5 mln termination fee to Peet's

(Recasts, adds background, analysts' comments, stock movement)

By Mihir Dalal

BANGALORE, Dec 8 (Reuters) - Green Mountain Coffee Roasters Inc (GMCR.O) agreed to buy its licensee Diedrich Coffee Inc DDRX.O for $35 a share in cash, extending its dominance of the single-cup coffee market and ending a bidding war with Peet's Coffee & Tea Inc PEET.O.

Diedrich, which licenses production of K-cup refills used in Green Mountain's fast growing Keurig brewers, said it cancelled its merger agreement with Peet's.

The proposed acquisition fits into the company's strategy of acquiring its licensees. This year, it has already bought Tully's and Timothy's, two of the four independent licensees for the K-cup refills used in its single-cup Keurig brewers.

Stifel Nicolaus analyst Mark Astrachan estimates Green Mountain will control about 85 percent of the K-cup market if it completes the Diedrich acquisition.

Waterbury, Vermont-based Green Mountain, which twice raised its offer from its original bid of $30 a share, expects the deal to be neutral to slightly accretive within the first 12 months after close, excluding one-time items, and add to earnings thereafter.

Janney Montgomery Scott analyst Mitchell Pinheiro said the acquisition makes sense from a strategic point of view as Green Mountain's royalty revenue would be at risk if they are unable to obtain new K-cup patents.

Green Mountain's patents for its K-cup technology expire in 2012, said Pinheiro, who owns Green Mountain stock.

The analyst said even if the company is unable to renew its patents, its dominance of the single-cup market will ensure that the downside is limited.

Analysts estimate that Green Mountain's Keurig brewers have more than 80 percent share of the single-cup brewer market.

ANTI-TRUST ISSUES UNLIKELY

On Monday, Peet's maintained that there were significant antitrust issues associated with Green Mountain's proposed deal with Diedrich. [ID:nBNG519363]

Single-cup brewers, which offer home customers some of the variety of brews available at a coffee shop, have been increasing their share of the overall coffeemaker category, with Green Mountain's Keurig driving the growth.

However, Astrachan said that the category is not big to invite anti-trust concerns.[ID:nBNG460191]

In a statement, Diedrich said Green Mountain paid for Peet's termination fee of $8.5 million.

Green Mountain, which is financing the deal through cash on hand and its credit lines, expects to complete the transaction in early 2010.

Diedrich's stock was down 1 percent at $34.70 Tuesday afternoon on Nasdaq, while Green Mountain's stock was up 4 percent at $63.06. Peet's stock was up 3 percent at $32.05. (Reporting by Mihir Dalal and Santosh Nadgir in Bangalore; Editing by Unnikrishnan Nair)

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