Diedrich to Buy Coffee People for $34 Million

By JOHN O’DELL

Feb. 10, 1999 12 AM PT

TIMES STAFF WRITER

In its third aggressive expansion maneuver in six months, Diedrich Coffee Inc. agreed Tuesday to buy Coffee People Inc. for about $34 million in cash and stock from its majority owner, Second Cup Ltd. of Toronto.

The deal would create a company with 364 outlets--including 76 coffeehouses--in 38 U.S. states and seven foreign countries.

Second Cup, which will retain 369 coffee “cafes” across Canada, remains North America’s second-biggest coffeehouse chain, trailing Seattle’s Starbucks Corp. and its 2,000-plus stores.

Diedrich Chairman John Martin has vowed, though, to catapult his Irvine-based company into an unchallenged second-place position, with 1,500 stores over the next few years, through a combination of acquisitions and franchise agreements.

The company executed two major franchise agreements late last year that will add 145 Diedrich coffeehouses over the next five years.

The Coffee People acquisition is Diedrich’s first. To complete the deal, Diedrich will pay $10.75 million in cash, 1.7 million of its shares--valued at $8.5 million at Tuesday’s closing price--and $14.25 million in cash or cash and stock. The exact terms depend upon completion later this year of a successful secondary stock offering by Diedrich.

Second Cup will wind up with a 10% to 13% stake in Diedrich.

The deal is expected to close early this summer.

Coffee People, which owns the Coffee People and Coffee Plantation chains of coffeehouses in Oregon and Arizona and the 281-outlet Gloria Jean’s coffee retailing chain in shopping centers throughout the United States and in seven foreign countries, had sales of $35 million last year.

Diedrich, with 36 coffeehouses and seven coffee carts in Southern California, Denver and Houston, had sales of $23 million. A spokesman said the combined companies expect to do about $80 million in sales next year.

The company went after Castroville, Calif.-based Coffee People, Martin said, because the acquisition “is like a steroid shot for us. It gives us the cash flow, size and locations we need to be taken seriously by the investment community.”

And Diedrich, whose stock barely moved Tuesday after the deal was announced, needs to be taken seriously by investors and analysts to raise the cash it needs to fulfill the goals set by Martin and his second-in-command, Tim Ryan. Both are former Taco Bell Corp. executives credited with helping that operation grow from a regional chain to the world’s largest Mexican-themed fast-food operation.

Ryan, who is president and chief executive of Diedrich, said the Coffee People purchase would give the company a boost in its efforts to grow big enough to threaten Starbucks’ supremacy.

Three distinct segments--neighborhood coffeehouses, mall-based coffee stores and coffee and espresso bars--are emerging as the coffee market matures, Ryan said. Acquiring the Coffee People operations, especially Gloria Jean’s, gives Diedrich “a leg up” in two of those segments, he added.

Diedrich’s stock closed Tuesday at $5 a share, up 13 cents in light Nasdaq trading, while Coffee People’s shares, traded in the over-the-counter market, gained 84 cents to close at $2.03.

“This is still a preliminary deal,” Martin said, remarking on the sluggish performance of Diedrich’s stock. “And it is very complicated. Once we have a definitive agreement, we will go on the road to help people in the investment market understand what we are doing.”

Bloomberg News contributed to this report.

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Bean-Counting

Irvine-based Diedrich Coffee Inc. will acquire rival Coffee People Inc. in a $35 million cash and stock deal. Here’s a look at the two companies; sales and earnings data in millions:

DIEDRICH COFFEE

Business: Coffee roaster, retailer/wholesaler

Headquarters: Irvine

Chairman: John H. Martin

President/CEO: Timothy J. Ryan

Employees: 750, including part-time.

Facilities: 36 coffeehouses, seven carts in Southern California, Colorado and Texas

Stock highlights

* 1-year return: -25.5%

* 52-week high: $8.25

* 52-week low: 3.38

* Tuesday close: $5.00, up 13 cents

Net Sales

1998

2nd qtr.: $5.8

3rd qtr.: $5.5

4th qtr.: $5.7

1999

1st qtr.: $5.9

2nd qtr.: $6.0

3rd qtr.: $6.0

Earnings

1998

2nd qtr.: $-.70

3rd qtr.: $-.74

4th qtr.: $-2.29

1999

1st qtr.: $-.75

2nd qtr.: $-.76

3rd qtr.: $-.61

****

COFFEE PEOPLE

Business: Sells coffee, beans, cookies, pastries, other drinks and coffee-related merchandise

Headquarters: Castroville

President/CEO: Alton McEwen

Employees: 1,400

Facilities: 26 Coffee People locations in Oregon, 14 Coffee Plantations in Arizona, 281 Gloria Jean’s retail outlets in shopping malls throughout North America and overseas.

Stock highlights

* 1-year return: -28.6%

* 52-week high: $4.50

* 52-week low: 1.00

* Tuesday close: $2.03, up 84 cents

Net sales

1998

1st qtr.: $7.9

2nd qtr.: $10.1

3rd qtr.: $7.4

4th qtr.: $9.6

1999