Diedrich Coffee to Acquire Coffee People

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 363 outlets--including 76 coffeehouses--in 38 states and seven 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 this Irvine-based company into an unchallenged second-place position with 1,500 stores during the next few years through acquisitions and franchise agreements.

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

To complete its first acquisition, Diedrich would pay Second Cup $10.75 million in cash, 1.6 million of its shares--valued at about $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 had sales of $35 million last year. It owns the Coffee People and Coffee Plantation coffee house chains in Oregon and Arizona, and the 281-outlet Gloria Jean’s coffee retailing chain in shopping centers throughout the U.S. and in seven other countries. Diedrich, which has 36 coffeehouses and seven coffee carts in Southern California, Denver and Houston, had sales of $23 million.

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 after word of the acquisition broke Tuesday, 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-theme fast-food operation.

Ryan, Diedrich’s president and chief executive, said the Coffee People purchase will 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, will give Diedrich “a leg up” in two of those segments, Ryan said.

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

Bloomberg News was used in compiling this report.