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Europe is set to have its first pure-play coffee company later this month when US food group Sara Lee spins off Douwe Egberts Master Blenders 1753 on Euronext in Amsterdam.
The new company, expected to have a market capitalisation of €4bn-€6bn, will be spun off on June 28 and begin official trading on July 9. Trading on the grey market kicks off on June 12.
Some analysts and industry players speculate that the spin-off could make the company more vulnerable to a takeover. However, the company has said it is committed to investing in advertising and innovation in the business, which has previously been run as a cash cow.
“The big challenge for us to turn around the company is to turn around roast and ground, because that is 50 per cent of the business and has been declining,” said Michiel Herkemij, chief executive.
The company has pledged to invest more in marketing and innovating its brands, including the 260-year-old Douwe Egberts. Innovation “basically stopped” in 2001, Mr Herkemij said.
The company has coffee sales of around $3.3bn, ranking it a distant third behind Nestlé of Switzerland, with $12bn, and Kraft of the US at $6bn. All but 6 per cent of Douwe Egberts’ sales come from coffee. Private labels also have a big slug of the market and are, in several regions, Douwe Egberts’ biggest competitor.
Besides Europe, it also operates in emerging markets including Brazil, where it garners roughly 15 per cent of total sales.
While the company operates in the single-serve segment spearheaded by Nestlé’s Nespresso – its pods go into an open system of machines made by Philips – its big focus is on roast and ground beans.
Sara Lee has a market capitalisation of $12.2bn and net debt of $1.4bn at fiscal year-end, of which $500m will stay with Douwe Egberts.
The initial public offering is a rare instance of a US company spinning off a unit on to a European exchange and faces additional challenges in addition to the market volatility that has forced a number of sponsors to pull IPOs recently.
These include flowback, whereby US investors sell the new European-listed shares as they no longer meet funds’ investing criteria or because investors are reluctant to hold stock denominated in foreign currencies that involve different tax treatment.
Sara Lee’s spin off marks the final step in the dismantling of the former food and personal care conglomerate. It opted to push ahead with the separation of its meat and beverages businesses in January last year after an informal process to sell the company failed to generate an offer acceptable to the board.
Coffee has proved a lucrative business for many players: it accounts for one quarter of Nestlé’s group profit and is its fastest growing and most profitable division, according to Deutsche Bank.
Analysts at the German bank, which is among the underwriters for the spin-off, said the group faces some “major challenges” including relatively low emerging market exposure and an increasingly competitive coffee capsule market.
“However, all of those challenges also present opportunities . . . there remains an opportunity to grow value through mix/premiumisation and investment into the capsule market should drive further growth of the market,” they concluded.