Peet's Deal For Diedrich Could Froth 'K-Cup' Business

Peet's Coffee & Tea Inc.'s (PEET) deal to buy Diedrich Coffee Inc. (DDRX) could add fuel to the hot growth seen in the single-cup coffee market while offering heightened competition to cafes.

Peet's, which on Monday announced its offer to buy Diedrich for about $213 million in cash and stock, plans to use its established grocery distribution system for selling its own bagged coffee to get Diedrich's single-serve packets into more supermarkets.

Grocery stores are under-penetrated market for "K-Cups," the single-serve coffee packets used in Keurig coffee machines, and provide an opportunity since consumers buy about 75% of their coffee tonnage at grocery stores, Dougherty & Co. analyst Gregory McKinley said in a research note.

But Peet's move could brush up against a recent push by Green Mountain Coffee Roasters Inc. (GMCR), which owns Keurig, into the grocery channel, where it's selling 12-count packages in 4,800 stores. Green Mountain permits several coffee brands, including Diedrich, to produce K-Cup products under licenses.

A Green Mountain spokeswoman said the company would not speculate on changes to the K-Cup market as a result of the deal.

Peet's also plans to eventually sell its namesake coffee in K-Cup forms, joining the fast-growing segment. Shipments of K-Cups are up 60% through its first three-quarters to $1.18 billion units, according to Green Mountain Coffee, while shipments of the machines needed to brew the cups are up 144% during that time.

By acquiring Diedrich, Peet's will also get the infrastructure needed to get set up those capabilities.

Peet's shares rallied on the news, jumping $3.56, or 10.3%, to $38.13 in recent trading, while Deidrich shares were at $25.79, up $5.43, or 26.7% but below the $26 a share offer price. Green Mountain also rose $1.56, or 2.3%, to $68.49.

The deal could help further the single-serve market as an alternative to coffee houses, potentially setting the category up to compete with the convenience of places including Starbucks Inc. (SBUX), said Greg Schroeder, analyst at Jesup & Lamont, although he noted that K-cups have a long way to go to make a dent in the away-from-home coffee business. Starbucks has recently joined the single-serve coffee game with its instant coffee product Via.

"The thing that Starbucks has to be aware of is that something is working well in the home market that could take share down the road," said Schroeder.

Other consumers may not take as fast. K-Cups require an upfront investment for a brewer, with the basic model listed for $89.95 on Keurig's Web site. While a K-Cup may cost about 60 cents per unit, many consumers may prefer to have someone else hand them their cup of coffee.

"The American consumer doesn't think that way. Convenience matters," Oppenheimer & Co. analyst Matthew DiFrisco said. "It's not as easy as handing a guy $2 at Starbucks for coffee."

-By Paul Ziobro, Dow Jones Newswires; 212-416-2194; paul.ziobro@dowjones.com

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