2nd UPDATE:Green Mountain Brews Up Bid War For Diedrich Coffee

A bidding war is brewing for Diedrich Coffee Inc. (DDRX) with competitors vying for control of the single-serve coffee brand.

Peet's Coffee & Tea Inc. (PEET) on Monday raised its earlier $26 a share offer for Diedrich to $32 a share in cash and stock, or $265 million, after Green Mountain Coffee Roasters Inc. (GMCR) said it proposed buying the company for $30 a share in cash. Diedrich's board is now reviewing both proposals.

Diedrich shares rallied 26.6% to $32.91 in recent trading on word of the competing bid, while Peet's shares fell $3.98, or 10.5%, in recent trading to $34.02. Green Mountain shares were down 49 cents, or 0.3%, at $64.69.

Peet's, which sells premium coffee and tea, is pursuing Diedrich to try to get a foothold into the fast-growing single-serve coffee market in the form of K-Cups, plastic pods used in Keurig coffee machines. The machines have exploded in popularity in recent years, as they offer a convenient way to brew a cup of coffee from a choice of multiple flavors. Over the last year, Keurig shipped 1.6 billion K-Cup portion packs, up 63% from last year.

The Keurig technology, however, is owned by Green Mountain, which appears to want to bring more of the brands licensed to sell K-Cups under its wings. Last week, Green Mountain bought a separate coffee brand, Timothy's Coffee of the World Inc., for $157 million.

Some analysts speculated that the Timothy's deal would keep Green Mountain from bidding on Diedrich, but both companies covet Diedrich's manufacturing facilities in Southern California. Peet's is hoping to eventually make K-Cups under its own label there, while Green Mountain wants to fill in a geographic area and have better distribution in the area.

The showdown also pits the two bidders' distribution capabilities against each other. Peet's views the acquisition as an opportunity to use its established grocery distribution to expand the reach of Diedrich's K-Cups into a channel that Green Mountain had only recently begun to sell into. Historically, Green Mountain has sold K-Cups at department and club stores.

Expanding sales of K-Cups, in whatever form, would produce benefits to Green Mountain, which collects a fee from each unit sold.

Peet's contends that its proposal will help also give both consumers and retailers more options as to where to buy the product. "We also remain convinced, perhaps now more than ever, that it would bring needed competition to the single K-Cup market," Peet's President and Chief Executive Patrick O'Dea said.

Rising K-Cup sales could eventually cut into visits to coffeehouses like Starbucks Corp. (SBUX) if the technology is adopted in enough homes, some analysts say. Starbucks is trying to get into the single-serve coffee game of its instant coffee product Via, sales of which Chief Executive Howard Schultz says are beating expectations.

K-Cups do raise an environmental concern in that some of its components make them difficult to recycle, something the company acknowledges. Green Mountain is researching alternatives to the petroleum-based materials used in the packaging and also offers a reusable pod.

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

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