WEBVTT - Bloomberg's Halen on JAB Holding Buying Krispy Kreme (Audio) 0:00:00.240 --> 0:00:04.560 Krispy Cream Donuts is going to be purchased for one 0:00:04.680 --> 0:00:09.520 point three or five billion dollars. The purchase by Austria's 0:00:09.680 --> 0:00:14.800 billionaire Ryman family. Well, they'll be adding to Pete's Coffee 0:00:14.840 --> 0:00:17.880 as well as Kurg Green Mountain. A lot of glazed 0:00:17.920 --> 0:00:21.639 donuts coming to those brands. Perhaps, let's find out more 0:00:21.800 --> 0:00:27.280 from Michael Halen. He is senior restaurant analyst for Bloomberg Intelligence. Michael, So, 0:00:27.320 --> 0:00:32.320 this is like the complete breakfast now, right, coffee and doughnuts. Although, 0:00:32.400 --> 0:00:35.640 and I'm looking at the Crispy Creame website you have 0:00:35.720 --> 0:00:38.519 to scroll down to even see a donut. Now, this 0:00:38.600 --> 0:00:43.199 is about coffee and sugary drinks. Yeah, it is about coffee. 0:00:43.240 --> 0:00:46.239 And although Krispy Kreme has you know, hasn't had a 0:00:46.280 --> 0:00:50.879 ton of success increasing their coffee sells. Um obviously, j 0:00:51.000 --> 0:00:55.200 ABC is a significant opportunity here, um, you know, to 0:00:55.200 --> 0:00:58.360 to use their expertise to help Krispy Creme, you know, 0:00:58.440 --> 0:01:00.920 expand coffee seals not only in their stores, but but 0:01:01.000 --> 0:01:03.920 in the retail channel. Why are they so interested in 0:01:03.960 --> 0:01:08.600 these coffee and consumer brands. Well, coffee makes a lot 0:01:08.640 --> 0:01:12.480 of sense because it's growing faster than other packaged foods 0:01:13.000 --> 0:01:15.399 in the US and across the globe. You know, we're 0:01:15.440 --> 0:01:19.120 talking about UM growth rate in the mid single digits, 0:01:19.240 --> 0:01:24.280 So it's a very attractive business. Um. It's typically very 0:01:24.360 --> 0:01:29.119 high margin, especially at the store level. Um. You know, 0:01:29.240 --> 0:01:31.240 and you know, they've made a lot of acquisitions, so 0:01:31.480 --> 0:01:34.800 so they're purchasing power is increasing, and they're going to 0:01:35.200 --> 0:01:37.800 gain some leverage on their coffee buys, which should help 0:01:37.840 --> 0:01:42.520 margins across the organization. Now, J A. B. The company 0:01:42.560 --> 0:01:48.240 that is purchasing Crispy Cream, already owns Caribou Coffee, Einstein 0:01:48.280 --> 0:01:53.880 Noah Restaurant Group, as well as a variety of other 0:01:54.160 --> 0:01:57.400 restaurants that perhaps some less familiar to many listeners. But 0:01:57.960 --> 0:02:01.560 is this a plan just to push into the restaurant 0:02:01.560 --> 0:02:04.320 business the coffee business? What what exactly are they coming 0:02:04.400 --> 0:02:10.720 up against Starbucks? It's mainly it's mainly for the coffee business. 0:02:10.800 --> 0:02:12.480 You know, we don't get a ton of information right 0:02:12.520 --> 0:02:16.040 because it's privately owned. But from what we can tell, 0:02:16.320 --> 0:02:19.919 it's mainly through uh, you know, growth of the coffee 0:02:19.919 --> 0:02:22.839 business and the coffee brand. So, you know, Krispy Cream 0:02:22.840 --> 0:02:25.400 has put a lot of effort into you know, they 0:02:25.440 --> 0:02:27.240 have a very strong brand, and they've been putting a 0:02:27.240 --> 0:02:31.160 lot of effort into Krispy Kreme branded drinks UH and J. A. B. 0:02:31.360 --> 0:02:33.560 Sees that as some low hanging for it. They think 0:02:33.560 --> 0:02:37.280 they can they can take Krispy Cream beverages, UM, expand 0:02:37.320 --> 0:02:41.959 the distribution, UM, get a greater attachment rate in the stores, UM, 0:02:42.360 --> 0:02:46.000 you know, and and UH increased sales and origins. How 0:02:46.000 --> 0:02:48.720 do you do a back of the envelope valuation for 0:02:48.800 --> 0:02:52.160 a company like Crispy Cream Donuts. One point three five 0:02:52.200 --> 0:02:55.760 billion is the estimated value of the deal. Sure, So 0:02:55.800 --> 0:02:59.279 it's interesting. So they're paying us, you know, almost seventeen 0:02:59.400 --> 0:03:03.320 times on an even Ebada basis based on this year's 0:03:03.320 --> 0:03:07.080 consensus Ibadan number, which some may say is kind of aggressive, 0:03:07.080 --> 0:03:09.000 but that's what they've been paying. That's what they paid 0:03:09.000 --> 0:03:11.320 for Pezze, That's what they paid for Caribou. And what's 0:03:11.360 --> 0:03:14.520 interesting is they're kind of discipline, so you know, you know, 0:03:14.560 --> 0:03:16.679 for example, Krispy Kreme has been rumored to be in 0:03:16.720 --> 0:03:21.040 the work since but with Krispy Kreme, Caribou, Pezze, UH 0:03:21.080 --> 0:03:24.160 and even curing all of the company, the target stock 0:03:24.760 --> 0:03:29.480 UH dropped precipitously before J. B. Made the offer. So 0:03:30.040 --> 0:03:33.000 although it may seem aggressive at you know, sixteen point 0:03:33.000 --> 0:03:36.520 eight times forward ibada UM, you know, this may be 0:03:36.640 --> 0:03:38.960 a trophy ibadan number that that it's based off of. 0:03:39.080 --> 0:03:41.960 So it's interesting because they showed discipline, UM, but they 0:03:42.000 --> 0:03:45.160 seem to strike when they feel the opportunity is right 0:03:45.200 --> 0:03:47.720 and they place a bid that doesn't seem to that 0:03:47.760 --> 0:03:52.200 you know, may not get any UM competition. Point to 0:03:52.200 --> 0:03:57.120 you about valuation. Are there other companies that that if 0:03:57.160 --> 0:03:59.800 you are invested in Krispy Kreme for just this type 0:03:59.800 --> 0:04:03.600 of situation, are there other brands that you would also 0:04:03.640 --> 0:04:07.040 pay attention to? Well, there's there's it's a dwindling numbers. 0:04:07.440 --> 0:04:10.480 J B has been very busy over the last four years. 0:04:10.480 --> 0:04:13.560 But um, there's only two left really that are publicly traded. 0:04:13.560 --> 0:04:16.479 We got Starbucks and Duncan brand. Starbucks doesn't make any sense. 0:04:16.520 --> 0:04:19.120 There are eighty three billion dollar market cap. Is is 0:04:19.279 --> 0:04:23.599 uh significantly larger we think than j a B. Duncan 0:04:24.480 --> 0:04:27.760 makes sense on a certain level because you know, the 0:04:27.839 --> 0:04:31.360 business model with the restaurants and a strong consumer branded 0:04:31.360 --> 0:04:35.000 retail business UM is very similar to Cariboo and Pezza 0:04:35.000 --> 0:04:41.159 and the other companies in the portfolio. They have stores, 0:04:41.160 --> 0:04:44.320 so they have a ubiquitous presence. But it's almost a 0:04:44.360 --> 0:04:46.920 hundred percent franchise, so it the presses the market cap 0:04:46.920 --> 0:04:50.039 of the company, it's only four point three billions, so uh, 0:04:50.080 --> 0:04:53.280 you know, you can you know, they maybe they may 0:04:53.320 --> 0:04:55.920 decide they want to purchase this brand and they might 0:04:55.920 --> 0:04:58.640 be able to get at a manageable price because of 0:04:58.640 --> 0:05:01.200 the franchise nature of it. You know. That being said, 0:05:01.200 --> 0:05:03.320 there's you know, there isn't the same amount of low 0:05:03.360 --> 0:05:07.240 hanging fruit like there were at at Crispy Cream and 0:05:07.279 --> 0:05:09.480 then at Pete and Cariboo, which were kind of regional 0:05:09.520 --> 0:05:11.800 and struggling to expand. So they don't really have the 0:05:11.839 --> 0:05:16.000 low hanging fruit here with Duncan doughnuts. Um. So if 0:05:16.040 --> 0:05:19.200 they are interested, they may remain patient. You know. Like 0:05:19.240 --> 0:05:22.040 I said, they pay about sixteen to seventeen times off 0:05:22.080 --> 0:05:25.040 for their targets. Uh, Duncan is at fourteen and a 0:05:25.080 --> 0:05:28.280 half times. Um. It may be too rich for this 0:05:28.480 --> 0:05:30.719 their blood at this time. Hey, my cloud want to 0:05:30.760 --> 0:05:34.360 I I know you maybe not primed for, but I've 0:05:34.360 --> 0:05:36.520 been reading your stuff on Sonic and I just find 0:05:36.520 --> 0:05:40.320 this to be a very interesting uh company. Uh, Sonic 0:05:40.960 --> 0:05:45.279 you believe has the opportunity to increase their average unit sales. 0:05:45.360 --> 0:05:48.440 And I'm wondering whether that has anything to do uh 0:05:48.600 --> 0:05:54.839 with at least stable, if not less expensive gasoline prices. Yeah, 0:05:54.880 --> 0:05:58.400 so they think they can do that, uh irrespective of 0:05:58.440 --> 0:06:01.960 what gasoline prices do, I'm And obviously lower gasoline prices 0:06:02.000 --> 0:06:05.800 will give their lower income consumers, um, you know, more 0:06:05.839 --> 0:06:08.840 pocket change and more money to buy Sonics burgers and 0:06:09.279 --> 0:06:12.240 talks and and all that good stuff line maids, you know, 0:06:12.320 --> 0:06:14.640 you name it, um, and it could give them a 0:06:14.680 --> 0:06:19.919 boost should gasoline prices remain low. But Sonic thinks they 0:06:20.040 --> 0:06:24.640 can increase those average una violnes by even without help 0:06:24.680 --> 0:06:27.960 from gasoline. And and what gives them confidence is that, 0:06:28.000 --> 0:06:30.960 you know, their best sites in their best restaurant in 0:06:31.000 --> 0:06:35.920 the best sites are doing significantly higher volumes. So, uh, 0:06:36.000 --> 0:06:38.480 it's to me they may be, you know, maybe getting 0:06:38.520 --> 0:06:42.320 a little bit more comfortable with their restaurants selection methodologies 0:06:42.720 --> 0:06:46.640 and could be giving them the confidence to to set 0:06:46.680 --> 0:06:49.320 such a to set such a lofty goal. Thanks very 0:06:49.400 --> 0:06:51.840 much for spending time with us. Michael Halen is senior 0:06:51.839 --> 0:06:54.880 restaurant analyst for Bloomberg Intelligence.