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Battle for Diedrich Coffee heats up

A takeover battle for an Orange County coffee roaster has turned downright frothy, with major rivals Peet’s Coffee & Tea Inc. and Green Mountain Coffee Roasters Inc. trading bids and barbs.

At stake is Diedrich Coffee Inc. of Irvine and a large chunk of business selling coffee cartridges, or pods. The fight has already pushed the price to $290 million from $213 million last month. And another bidding deadline is today.

These single-use ground coffee pods fit into the popular Keurig single-cup brewers sold in department stores and household goods suppliers such as Target and Bed, Bath and Beyond.

Green Mountain of Waterbury, Vt., owns the Keurig brewing system patent and is busy buying a handful of roasters that hold licenses to make the “K-Cup” cartridges for Keurig-style coffee makers.

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Diedrich, a Southern California coffee company since the 1970s, is one of the last two license holders left that have not been acquired by Green Mountain. The other is Van Houtte of Montreal.

Peet’s, the Emeryville roaster with a large chain of coffeehouses, covets Diedrich’s license to make the cartridges, believing it would provide an entry into the home and office single-cup brewing market.

“Peet’s wants in, and Green Mountain would like to keep Peet’s out,” said Kenneth Davids, editor of CoffeeReview. com.

The battle has been brewing for more than a month. On Nov. 2, Peet’s announced a deal to acquire Diedrich in a cash and stock transaction for $26 a share, or $213 million. The deal allowed Diedrich to entertain higher offers. And that’s exactly what happened.

Green Mountain and Peet’s started trading bids. Green Mountain now has the higher, offering $35 a share in cash, or $290 million.

Peet’s has until 5 p.m. today to raise its bid.

Diedrich began operations in California in 1972 as an importer of roasted coffee grown on a family-owned plantation in Guatemala. Carl Diedrich, who died in 2001 at age 86, later opened the first Diedrich store in Newport Beach. His family developed the business into a chain that went public in 1996.

In 1997 the company hired former Taco Bell Chairman John Martin to run the company. Martin embarked on a buying spree, snapping up such chains as Coffee Plantation, Coffee People and Gloria Jean’s Coffees. Those acquisitions boosted Diedrich’s retail outlets to nearly 400, most of which were franchised.

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But the company lost money as it sought to manage such a large network and began to abandon the retail business.

Three years ago it sold 40 Diedrich and Coffee People cafes to Starbucks to concentrate on coffee roasting and distribution. Most of the Diedrich outlets were in Orange and Los Angeles counties, and the Coffee People stores were in the Portland, Ore., area.

Diedrich has since completely left the retail coffee business except for a small amount of online sales.

Green Mountain’s Keurig brand is the leading single-cup coffee-brewing system in the United States, and the K-Cup cartridges hold higher profit margins than what roasters get when selling whole and ground beans for use in larger coffee makers.

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“They make their money selling the blades and not the razors,” said Davids, the coffee expert.

Consumers pay $20 to $24 a pound for the single-serving coffee cartridges, about double what they pay for specialty coffee in the traditional bag form, according to Peet’s.

People who use the system also tend to be less sensitive to coffee price hikes because they have become wedded to the system and shelled out $75 to several hundred dollars for a Keurig brewer, Peet’s said.

Peet’s argues that a Green Mountain acquisition of Diedrich’s cartridge business would give the company control of almost the entire K-cup market and might violate antitrust regulations. Green Mountain has an estimated 80% of the cartridge market.

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“In light of the significant antitrust issues we think are associated with any proposal by [Green Mountain] to acquire Diedrich, we believe that the terms of our most recent proposal remain superior,” said Patrick O’Dea, Peet’s chief executive.

But Green Mountain said the coffee market is so big and fragmented that there would be little antitrust interest in such a merger. The company said its share of the U.S. coffee market amounts to about 5% to 6% at best.

Mitchell Pinheiro, an analyst at Janney Capital Markets, agrees that a Green Mountain acquisition of Diedrich is unlikely to be an antitrust issue. And he believes Green Mountain will be the “winner given its ability to ultimately bid higher and the attractiveness of its all-cash offer.”

Regardless of the outcome, it’s clear that Diedrich shareholders have already won. The stock rose 12 cents Friday to close at $35.35. A year ago it was just 30 cents a share.

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jerry.hirsch@latimes.com

twitter.com/LATimesJerry


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