Keurig Green Mountain- Bevyz Deal: More Than Just An Acquisition

The Vermont based K-Cups maker, Keurig Green Mountain (NASDAQ:GMCR) announced yet another milestone deal, when it entered into an agreement to acquire the remaining 85% equity of Bevyz, a fully owned subsidiary of MDS Global Holding Ltd., in the first week of December 2014. ^[1] Keurig initially held a 15% stake in Bevyz on a fully diluted basis, and agreed to acquire the remainder for a transaction worth €178 million (approximately $220 million). The deal is scheduled to close in January 2015. Founded in 2004, Bevyz operates in the Netherlands and Malta, and is well known for a unique, patented single-portion multi-drink system, Bevyz Fresh. The system dispenses a wide range of hot, cold, and sparkling beverages, including water, tea, coffee, fruit juices, energy, and soft drinks. This unique single-serve capsule technology allows the user to prepare different varieties of beverages quickly, with no residue or taste carry-over from the previous serving.

Keurig Green Mountain (NASDAQ:GMCR) recently reported strong figures in its fiscal 2014 annual report on November 19, with 14% year-over-year (y-o-y) growth in net revenues. On one hand, net portion pack sales grew 22% y-o-y to $950 million in the fourth quarter, primarily driven by a 28% increase in the portion pack volumes, but on the other hand, brewer sales declined 5% y-o-y in the fourth quarter, due to a decline in brewer volumes by 8% and brewer pricing by 11%. ^[2]

We have a $108 price estimate for Keurig Green Mountain, which is roughly 20% below the current market price.

See our full analysis of GMCR here

Carbonation Market- A New Market For Keurig Green Mountain

With this deal, Keurig Green Mountain is planning to expand its reach into the carbonation market. In September 2014, Keurig and Coca-Cola (NYSE:KO) announced they are expanding their partnership to offer some beverages from the latter’s still brands (non-carbonated) portfolio in the Keurig hot brewing system, in the U.S. and Canada. ^[3] Both the companies are together developing a new cold beverage brewer- Keurig Cold, to be released somewhere in the fall of 2015. Keurig Cold will be designed to dispense single servings ranging from carbonated drinks to non-carbonated beverages like juice drinks and iced teas. Keurig announced that Honest Tea might be the first brand of the Coca-Cola Company that would be available in K-Cup packs. The new Honest Tea K-Cup packs will feature two products initially, Unsweetened Just Green iced teas and Just Black iced teas, and they will join Keurig’s Brew Over Ice collection. Ready-To-Drink (RTD) tea is one of the fastest growing segments in the beverage industry. In the U.S., the RTD segment registered a high double-digit percent growth to reach $5.1 billion in sales. RTD tea is expected to generate sales of $5.3 billion in 2014 and grow at a CAGR of over 6% till 2018, providing ample growth opportunities to tea making companies. ^[4] The per capita tea consumption in the U.S. was 8.9 gallons in 2012. ^[5] The sales of specialty RTD tea & coffee at retail stores  in the U.S. rose 25% in the last two years.

Keurig Green Mountain has now added a new drink brewing machine to its arsenal. The carbonation market is intensifying, with Bevyz joining hands with Cuisinart as its hardware partner and Pepsi as a flavor provider. ^[6] Earlier this year, PepsiCo (NYSE:PEP) entered the at-home carbonation market by partnering with Bevyz. PepsiCo launched its flavor sachets compatible with the Bevyz Fresh Machine in May 2014 in the U.S. (See: PepsiCo set to enter at-home carbonation market with Bevyz) However, later on, PepsiCo discontinued its licensing agreement with Bevyz Global, after the disappointing performance of the Bevyz Fresh product line.

What Can Keurig Gain From This Deal?

Coca-Cola has invested roughly $2 billion in Keurig Green Mountain this year, with a potential aim to use Keurig’s Platform to expand into carbonated beverage market. Moreover, with Bevyz under its product line, Keurig might dominate the segment. The Bevyz Fresh machine has a completely different technology, as it is compatible with both hot and cold beverages such as carbonated soft drinks (CSD), frappes, juices, teas, energy drinks, and coffee. An all-in-one machine replaces the need for separate appliances and could attract consumers based on its convenience and counter-top space optimization.

Despite the recent marketing disappointments, Keurig sees a great potential in the Bevyz product line. Recently, Keurig has been adding various coffee, retail, and soft drink brands under its portfolio, and now with the addition of new technology, the company might be looking to extend its reach among U.S. consumers and to strengthen its dominance in the carbonation market.

With a great marketing strength, huge brand appeal, and numerous big brands in its line, including Coca-Cola, the K-Cups maker might just introduce and expand Bevyz’s presence in the U.S. The innovative technology used in the Bevyz machine might help Keurig to develop new machines in the future that can work as an all-in-one product. This machine also works as a water cooler, which puts it in contention in the domestic water cooler market as well. Around 5.48 million water coolers were sold in the U.S. in 2013, and this figure is expected to climb to 6.1 million units by 2018. ^[7] Consumers might look to meet their chilled drinking water requirements through the Bevyz units. It might be a huge boost for Keurig’s revenue growth, if there is a potential rise in sales of Bevyz units. Tapping into a new and lucrative market with strong and popular brand names, as well as innovative technologies might help Keurig to attract customers in the initial phases.

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1. Keurig Green Mountain to acquire Bevyz Global Ltd. [↩]
2. Keurig Green Mountain FY 2014 earnings conference call [↩]
3. Keurig Green Mountain, Inc. and the Coca-Cola Company expand agreement to the Keurig hot brewing system [↩]
4. “RTD tea production in the US“, January 2014 [↩]
5. Per capita tea consumption in the united States, www.Statista.com [↩]
6. Cuisinart and Bevyz sign agreement to market premium multi-drink system [↩]
7. “US water cooler market up to 5.5 million units“, November 2013, zenithinternational.com [↩]