Is This Stock a Good Merger-Arbitrage Opportunity?

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Caribou Coffee Company (NASDAQ: CBOU) saw Gamco Investors take a new stake in the coffee company over the past few days. Per a round of 13D filings with the SEC, Gamco announced that it now owns 1.38 million shares, with the investment company’s most recent round of buying being at $15.99. Gamco is a publicly traded investment firm that focuses on finding long-term opportunities that offer its investors capital appreciation. Founder Mario Gabelli continues to own 50% of the investment company and mega-billionaire Bill Gates is also a notable investor (check out Bill Gates’ top picks).

Caribou recently had the German holding company Benckiser group announce its buyout of the coffee company earlier this week, sending the stock up over 25%. The buyout comes to $340 million or $16 per share. Gamco could be trying to capitalize on the very tightly margined merger-arbitrage opportunity or betting on a possible increase in the buyout price.

Panera Bread (NASDAQ: PNRA) has been competing with various coffee and breakfast companies, among other fast food companies as well. This fast food company is also one of the high growth food retail stocks in the industry thanks to a transition in consumer preference toward healthier and fresher foods. Panera is up almost 25% over the last twelve months and is still expected to grow earnings at 19% annually over the next five years. The food company also trades at 31x trailing earnings, with a forward P/E of only 24x, making it both a value and growth play.

Dunkin Brands Group (NASDAQ: DNKN) is up over 15% since its mid-2011 IPO, and with its strong expected expansion plans should continue to rise. Dunkin has a solid expected growth rate of 17% for the next five years and also pays a modest dividend yielding 1.8%. Billionaire Ken Griffin – founder of Citadel Investment Group – found a reason to love Dunkin last quarter, upping his stake over 1300% (check out Ken Griffin’s newest picks).

Krispy Kreme Doughnuts (NYSE: KKD) is another notable Caribou competitor and has the best expected growth rate for the next five years at 25% and trades at only 4x trailing earnings – making it an impressive growth at a reasonable price opportunity. Krispy could be another potential takeover that Benckiser could target, although it would be a bit rich for the buyout company at a $600 million market-cap.

Einstein Noah Restaurant Group (NASDAQ: BAGL) recently approved a $4 special dividend that puts the one-time yield on the stock at 3%. Recent 3Q results came in at $0.20 versus $0.17 in 3Q 2011. Einstein has been exploring the combination or sale of its company, or the recapitalization of its stock, and would be a likelier candidate for Benckiser. Billionaire David Einhorn of Greenlight Capital is Einstein’s largest fund owner by far with over 10 million shares (check out David Einhorn’s newest stocks).

After purchasing the coffee roaster Peet’s in 2011, Benckiser has now turned its attention to the premium coffee market. If Benckiser wants to add to its coffee-themed buyouts, it could take a look at Einstein, which trades with a market value of only $275 million. Einstein would add a breakfast and food segment to Benckiser’s robust coffee portfolio. Caribou Coffee has over 600 outlet stores, which will add to Peet's Coffee and Tea outlets, putting the total outlet stores to over 800; Starbucks boasts over 1,100 outlets. We also see Einstein as one of the better value plays when compared to Caribou or Krispy Kreme; Einstein trades at only 0.6x earnings, where Caribou is at 1.1x and Krispy Kreme is at 1.4x. 

This article is written by Marshall Hargrave and edited by Jake Mann. They don't own shares in any of the stocks mentioned in this article. The Motley Fool owns shares of Panera Bread. Motley Fool newsletter services recommend Panera Bread. 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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