A Coffee Deal for the Long Haul

April 12, 2013 Bart Becht’s $10 billion coffee run has a dash of Warren E. Buffett about it.

Mr. Becht, the former Reckitt Benckiser boss, is leading an agreed buyout of D.E Master Blenders 1753, the Dutch outfit behind Douwe Egberts. Like the Omaha investor’s recent $23 billion move on Heinz, this deal blends consumer goods, cheap debt and private capital staked by billionaire families.

The cash bid of 12.50 euros a share is worth about 7.8 billion euros including debt. That means Germany’s Joh. A Benckiser, where Mr. Becht is chairman, is paying a full-looking 15.6 times forward earnings before interest, taxes, depreciation and amortization, based on Liberum Capital forecasts, for D.E Master Blenders, the world’s third-biggest coffee maker. Mr. Buffett paid 14.6 times 2013 Ebitda for Heinz. Counterbids seem unlikely.

Given the high purchase prices, it must be assumed that the ketchup, and now coffee, buyers are set to be long-term holders. Potential returns will be juiced by mountains of leverage, though. It helps that debt is cheap and abundant, as it can be if you borrow against secure consumer-industry cash flows. Joh. A Benckiser will lift D.E Master Blenders’ debt to 3 billion euros from 258 million euros, or more than six times next year’s Ebitda. That would be too racy for European public investors — but is probably fine for a privately owned business.

In both deals, personal fortunes are being recycled back into the consumer sector, by patient families and entrepreneurs. Mr. Buffett bought Heinz with the Brazilian brewing billionaires behind Anheuser-Busch InBev. Joh. A Benckiser is a vehicle for the Reimann family, major investors in Reckitt, and it is also tapping some of Anheuser-Busch’s Belgian backers, and a Colombian brewing dynasty, for equity financing.

It’s not clear whether there are meaningful synergies with Benckiser’s cafe chains, Peet’s Coffee & Tea and Caribou Coffee. But Mr. Becht could consolidate coffee- and tea-making, much as Anheuser-Busch did in brewing. The market is fragmented. Targets could include Green Mountain Coffee Roasters, J.M. Smucker or the privately held Orimi of Russia. The food conglomerate Mondelez, which owns the world’s second-biggest coffee business, may one day seek to sell out. And family-controlled groups like Strauss, Tchibo and Illy might find Joh. A Benckiser a sympathetic partner.

Growing global thirst for coffee should help, too. Euromonitor forecasts 36 percent market growth in the five years to 2017, to $103 billion. It is hardly surprising then that Mr. Becht thinks Douwe Egberts is worth a shot. Coffee makers across the globe are in for a jolt.