What The Caribou Coffee Acquisition Means For Panera Bread

Eric is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

When Joh. A. Benckiser followed up its Peet's buy with a purchase of Caribou Coffee, (NASDAQ: CBOU) JAB posed a bigger challenge to Starbucks (NASDAQ: SBUX) in the United States coffee shop business. The Caribou Coffee acquisition has implications for a well-known Starbucks competitor as well. Both Peet's and Caribou Coffee also competed with Panera Bread (NASDAQ: PNRA) for coffee drinkers. This acquisition helps demonstrate where Panera remains strong, and even highlights some opportunities for this bread and coffee seller.

Branding

Both Peet's and Caribou Coffee offered premium coffee blends in environments where coffee drinkers could sit and relax. JAB's purchases suggest that the upscale coffee shop concept still has growth potential in the United States, which is good news for Panera. Panera has a broader food menu than a traditional coffee shop, offering a variety of sandwiches and prepared meals, but it retains coffee shop appeal by offering a location for diners to chat with friends, study, and hold meetings. Peet's and Caribou Coffee both had some success with this model, although neither coffee shop chain achieved Panera's national presence.

Expansion

Peet's and Caribou Coffee had limited funds for expansion as independent chains. JAB could develop either chain into a national powerhouse to compete with Starbucks and Panera. Caribou Coffee and Peet's territories didn't overlap much, so JAB could also expand while keeping the chains relatively separate. Panera has three store brands itself, which include its namesake stores, the original St. Louis Bread Company brand that it still uses in some stores around St. Louis, and the Paradise Bakery and Cafe brand.

Panera currently has a wider reach, with stores in 44 states, than either Peet's or Caribou Coffee. Caribou Coffee has stores in 21 states, while Peet's has stores in six states. Both Peet's and Caribou Coffee have stores in Colorado and Illinois, so JAB gained retail stores in 25 states with these acquisitions, which leaves 25 more states where JAB can expand. Bringing Peet's and Caribou Coffee to other states isn't JAB's only expansion option, though.

Acquisition Possibilities

JAB demonstrated its willingness to spend big when it bought Peet's and Caribou Coffee. Leslie Patton and Tom Jarvis, at Bloomberg, reported that Peet's cost JAB $941 million and Caribou cost JAB $340 million. That adds up to $1.28 billion for the acquisitions alone, without considering any more cash that JAB invests in the chains.

Panera had a market cap of $4.9 billion on Dec. 19, 2012, so an acquisition would cost a lot of dough. With Peet's and Caribou Coffee gone, though, companies that want to buy coffee shops have fewer options. A Panera acquisition doesn't offer as much for Starbucks, because Starbucks already has stores that can sell bread from the La Boulange bakery it bought this year. A Panera buy makes a lot more sense for JAB, although JAB hasn't announced any plans to buy the bread maker. JAB would have to pay a premium right now because of Panera's growth prospects.

Valuation

Going by the PEG ratio, Caribou Coffee's 1.12 PEG looks cheaper than Panera's 1.46 PEG even after including the acquisition premium, but this valuation prices in substantial growth for Caribou Coffee. Caribou Coffee has a higher forward P/E, at 29, than Panera's 24 figure. A company with a similar line of business offers a cheaper deal for an acquirer right now, though. Einstein Noah Restaurant Group (NASDAQ: BAGL) has a 1.10 PEG and a 15 forward P/E at the moment, and its $273 million market cap is less than what JAB paid for Caribou Coffee. Either Panera or JAB could buy Einstein Noah, but again, neither company has announced any plans to buy the bagel shop.

Takeaway

Both Caribou Coffee and Peet's shared many business model advantages with Panera, and Panera's growth history suggests that it may have benefited even more from these advantages. JAB does pose a larger competitive threat to Panera now, but Caribou Coffee and Peet's didn't stop Panera from growing before. Finally, the price that JAB paid for Caribou Coffee suggests that paying a premium for Panera makes sense. JAB's recent acquisitions support the Panera bull case. 


enovinson has no positions in the stocks mentioned above. The Motley Fool owns shares of Panera Bread and Starbucks and has the following options: short JAN 2013 $47.00 puts on Starbucks. Motley Fool newsletter services recommend Panera Bread and Starbucks. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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