* Joh A Benckiser agrees to buy D.E Master Blenders
* 12.5 euros per share cash bid is below initial proposal
* No plans to sell Reckitt shares to fund deal
* JAB aims to close gap on coffee leaders Nestle, Mondelez
AMSTERDAM, April 12 German investor Joh A Benckiser (JAB) is to buy the owner of Douwe Egberts coffee in a 7.5 billion euro ($9.8 billion) deal to create a global hot drinks empire aimed at taking on market leaders Nestle and Mondelez International.
D.E Master Blenders 1753, the Dutch owner of Douwe Egberts coffee and Pickwick tea, said on Friday it had reached conditional agreement on a 12.50 euros per share cash takeover offer from a group of investors led by JAB.
JAB, the investment vehicle of the billionaire Reimann family, has been building a hot drinks business in a bid to tap strong growth driven by new products, such as single-serve coffee brewers, and demand from emerging markets.
It owns Caribou Coffee Co Inc and Peet's Coffee & Tea Inc in the United States, and has had its eye for some time on D.E Master Blenders, which has a strong position in Europe.
The offer is below an original proposal from JAB of 12.75 euros per share. But it still represents a 36 percent premium to the stock's average closing price in the three months before the proposal was disclosed.
Analysts said the price compared favorably with recent similar deals and saw little chance of a rival bid, not least because JAB already owns around 15 percent of D.E Master Blenders, meaning it will actually pay about 6.4 billion euros.
Chief Executive Jan Bennink, who will step down after the takeover, said D.E Master Blenders had not had contact with other potential buyers.
"We consider the probability of a higher offer to be slim," KBC Securities analysts Pascale Weber and Jan-Willem Billiet said in a note, recommending investors accept the offer.
They said the price represented a ratio of enterprise value (debt plus equity) to expected 2014 earnings before interest, tax, depreciation and amortization (EBITDA) of 15.7 times.
In comparison, analysts pointed to a deal by Warren Buffett's Berkshire Hathaway and 3G Capital to buy H.J. Heinz Co at a 2013 EV/EBITDA of 14.6 times.
D.E Master Blenders' stock closed down 0.98 percent at 12.11 euros.
FROM BEER TO BEANS
JAB's Bart Becht, a former chief executive of Reckitt Benckiser who will become chairman of the Dutch company, said D.E Master Blenders would provide a platform for organic growth and for acquisitions in the coffee and tea sectors.
He said JAB plans to keep the Dutch company separate from its U.S. coffee shop business, since there are few synergies between the retail side and packaged goods side. The brands are unknown in each other's markets and the businesses are run quite differently, Becht said.
JAB is still open to more deals both on the retail side, which is home to U.S. chain operators such as Starbucks Corp and Dunkin Brands, and the packaged coffee side, which includes players such as J.M. Smucker Co in the United States and Lavazza in Italy.
Given the credentials of JAB's principals and their connections to deal-making consumer products giants such as Reckitt Benckiser, Anheuser Busch InBev and Mars, observers expect JAB to move to build its coffee business into a much bigger player.
"We have done this before," Bart Becht said in an interview.
Following the acquisition, D.E Master Blenders board would include Becht, and other JAB principals Peter Harf, a former chairman of AB InBev, Olivier Goudet, head of its audit committee and Alexandre Van Damme, who is also connected to AB InBev. Also involved is Alejandro Santo Domingo, a board member of SABMiller.
"They see a lot of similarities between the coffee and beer industries, for example in terms of production, marketing and branding," said a person familiar with the deal. "They want to consolidate and build the brands."
But Becht said: "These people made a lot of money in beer and they are looking to diversify their portfolios. That's the principle reason why we've been talking to them."
Because JAB is controlled by the German Reimann family, Becht said the firm enjoyed working with other family-owned investors, including the beer-derived holdings involved in this deal.
"It's much easier to agree on the long-term nature of our investments. We are looking at this as a 15-20 year investment," he said.
The Reimann fortune comes from the Benckiser chemicals company, founded in 1823. The family also controls perfumes and cosmetics group Coty, and owns Labelux Group, manager of luxury brands Bally, Belstaff and Jimmy Choo.
Douwe Egberts coffee is one of the best-known brands in the Netherlands and its parent company, D.E Master Blenders, ranks third in terms of coffee sales after market leader Nestle and Mondelez International, according to Euromonitor International.
But the Dutch firm, which also owns Senseo coffee, has had a rocky time since it was spun off last year from Sara Lee Corp, which has since changed its name to Hillshire Brands.
Within weeks of its listing, it shocked investors with the news its Brazilian unit had been hit by fraud, tax and inventory problems, forcing it to restate past financial statements.
Previous CEO Michael Herkemij quit in December, just six months after the stock market debut, and in February the firm reported lower-than-expected profits and cut its outlook for 2013 citing pricing pressures in austerity-hit Europe.
JAB said it would finance the deal through a combination of roughly 3 billion euros of debt and about 4.9 billion euros in equity, and said it had committed financing from arrangers Bank of America, Citibank, Rabobank and Morgan Stanley.
It does not plan to sell any of its 10 percent stake in Reckitt Beckiser to finance the coffee deal, a spokesman said.
The deal is conditional on issues including regulatory approval.
Leonardo & Co., BDT & Company, Bank of America Merrill Lynch and Rabobank/Rothschild are financial advisers to JAB. Lazard is lead financial adviser to D.E Master Blenders, with Goldman Sachs and JP Morgan also acting as financial advisers.