Mondelez International to Acquire D.E Master Blenders, to Form World's Leading Pure-Play Coffee Company

08 May 2014 --- Mondelez International, Inc. and D.E Master Blenders 1753 B.V. have announced their intention to combine their respective coffee businesses to create the world's leading pure-play coffee company, with annual revenues of more than $7 billion (€5 billion) and an EBITDA margin in the high teens.

The new company, to be called Jacobs Douwe Egberts (JDE), will be based in the Netherlands. It will hold leading market positions in more than two dozen countries and have a strong emerging market presence, giving it significant revenue synergy opportunities in the $81 billion global coffee category. The two companies own some of the world's leading coffee brands, such as Jacobs, Carte Noire, Gevalia, Kenco, Tassimo and Millicano from Mondelez International and Douwe Egberts, L'OR, Pilao and Senseo from D.E Master Blenders 1753.

"Jacobs Douwe Egberts will leverage the rich histories of both companies, combining our complementary geographic footprints, portfolios of iconic brands and innovative technologies to offer more people around the world more access to high-quality coffee and allowing the company to capitalize on the significant growth opportunities in a highly attractive market," said Pierre Laubies, CEO of D.E Master Blenders 1753 and prospective CEO of the combined company.

It is the latest move by JAB to strengthen its position in the global coffee market. The company bought the owner of Douwe Egberts coffee last year in a 7.5bn euro deal, and it also bought US coffee chains Caribou Coffee and Peet’s Coffee & Tea in 2012 for $340m and $ibn respectively. The latter two coffee chains, which compete with chains such as Starbucks, will not be part of the new company.

Mondelez’s coffee business in France will also not be part of the new company, although it has been reported that JAB has made an offer for that business.

Another aspect of the deal is that it will allow Mondelez to focus on its thriving snacks business, which includes iconic brands such as Cadbury chocolate and Oreo cookies. Snacks are then expected to account for 85% of its revenue, compared with its current 75%.

The new company will reportedly focus on the grocery and home-brewing side of the global coffee market.

"We're delighted with this transaction and the substantial value we expect to create for our shareholders," said Irene Rosenfeld, Chairman and CEO of Mondelez International, whose coffee portfolio has outpaced market growth since 2010, thanks to innovations such as the Tassimo multibeverage on-demand brewing system and Millicano wholebean instant coffee. "By retaining a significant stake in the combined company, we'll continue to benefit from the future growth of the coffee category and share in the synergies and tremendous upside of this leading, one-of-a-kind coffee company.”

The parties have entered into an agreement to combine Mondelez International's wholly owned coffee portfolio (outside of France) with D.E Master Blenders 1753. In conjunction with this transaction, Acorn Holdings B.V. ("AHBV"), owner of D.E Master Blenders 1753, has made a binding offer to receive Mondelez International's coffee business in France. The parties have also invited Mondelez International's partners in certain joint ventures to join the new company. The transactions remain subject to regulatory approvals and the completion of employee information and consultation requirements.

In 2013, Mondelez International's wholly owned coffee business generated approximately $3.9 billion (€2.9 billion) in revenue, and D.E Master Blenders 1753 generated approximately $3.4 billion (€2.5 billion) in revenue.

Upon completion of all proposed transactions, Mondelez International will receive cash of approximately $5 billion and a 49 percent equity interest in Jacobs Douwe Egberts. AHBV will hold a majority share in the proposed combined company and will have a majority of the seats on the Board, which will be chaired by current D.E Master Blenders 1753 Chairman Bart Becht. AHBV is owned by an investor group led by JAB Holding Company s.a r.l. Mondelez International will have certain minority rights.

The transactions are expected to be completed in the course of 2015, subject to limited closing conditions, including regulatory approvals. During this time, Mondelez International and D.E Master Blenders 1753 will undertake consultations with all Works Councils and employee representatives as required in connection with the transactions.

The news came as Mondelez International, Inc. reported solid first quarter 2014 results. The company also announced plans to reduce operating costs to best-in-class levels through a restructuring program that is expected to deliver cost savings of at least $1.5 billion by 2018, providing additional opportunity for margin expansion beyond its revised 2016 target of 15 to 16 percent.

"The strategic and cost-reduction actions we announced today underscore our determination to become a leaner, more focused and more nimble global snacking powerhouse," said Irene Rosenfeld, Chairman and CEO. "As our first quarter results show, we're making meaningful progress toward our margin goals, while continuing to deliver solid growth and market shares. These strategic and cost-reduction actions will strengthen our core snacking business, simplify our operations and enhance our ability to deliver world-class margins. At the same time, our shareholders will continue to share in the future growth of the coffee category through our ownership interest in an advantaged, more focused coffee company."

In conjunction with the proposed coffee transaction, Mondelez International also announced its plan to create a leaner, simpler and more focused organization by reducing operating costs to best-in-class levels through zero-based budgeting and by accelerating its supply chain reinvention initiative.

To facilitate these efforts, the Board of Directors approved a $3.5 billion restructuring program through 2018 (the "2014-2018 Restructuring Program"), comprised of approximately $2.5 billion in cash costs and $1 billion in non-cash costs. The restructuring program is intended primarily to cover severance as well as asset disposals and other manufacturing-related one-time costs. The company expects to incur the majority of the program's charges in 2015 and 2016. The $2.2 billion of capital expenditures to support the restructuring program are already included within the company's previous guidance of approximately 5 percent of net revenues for the next few years.

The company expects the 2014-2018 Restructuring Program to generate annualized savings of at least $1.5 billion by 2018. Lower overheads and accelerated supply chain cost reductions are each expected to generate roughly half of the total incremental savings. Overhead reductions will be driven by both lower headcount and non-headcount costs.

"Today's coffee announcement creates an opportunity to further reduce our supply chain and overhead costs and fast-track the implementation of best-in-class cost management practices on a global basis," said Dave Brearton, Executive Vice President and CFO. "The savings generated by this new restructuring program will enable us to accelerate our margin improvement program. Specifically, we're raising the bottom end of our 2016 Adjusted Operating Income margin target, resulting in a revised range of 15 to 16 percent, up from our previous target of 14 to 16 percent. After 2016, we expect the cost savings will provide additional fuel to fund growth and drive further margin expansion."

In the first quarter, the company delivered Organic Net Revenue growth in line with expectations, strong Adjusted Operating Income margin improvement and double-digit growth in both Adjusted Operating Income and Adjusted EPS on a constant currency basis.

On a reported basis, net revenues were $8.6 billion, down 1.2 percent, and operating income was $843 million, up 1.1 percent. Diluted EPS was $0.09, including a negative 18 cents from the loss on debt extinguishment and a negative 9 cents from the remeasurement of net monetary assets in Venezuela.

Organic Net Revenue increased 2.8 percent, including a negative 0.6 percentage point impact from lower coffee revenues, reflecting the pass-through of lower green coffee costs. Overall, pricing was up 2.5 percentage points, as the company increased prices across most non-coffee categories in every region. Volume/mix was up slightly despite these higher prices. The 0.4 percentage point headwind from Easter shifting to the second quarter was lower than expected. Market share performance was strong, with over 60 percent of revenues gaining or holding share.

Organic Net Revenue from emerging markets5 was up 6.7 percent and developed markets6 increased 0.2 percent. Overall, Power Brands grew 4.8 percent. Tuc, Club Social, belVita and Chips Ahoy! biscuits, Cadbury Dairy Milk and Milka chocolate and Tang powdered beverages each posted at least high single-digit increases.

On a regional basis, highlights include:
• Latin America increased 14.7 percent, largely driven by pricing gains, especially in the inflationary economies of Venezuela and Argentina. Brazil grew high single digits, as strong double-digit growth in powdered beverages and biscuits was partially offset by the impact from the later timing of Easter on chocolate.
• Asia Pacific was down 2.7 percent. Lower volume/mix was mostly attributable to China where difficult prior year comparisons in biscuits more than offset a strong performance in gum. India delivered another strong quarter with mid-teens growth driven by chocolate and powdered beverages.
• EEMEA was up 7.9 percent, reflecting strong volume/mix gains and modest pricing. Revenue growth in the region was broad-based, with a high single-digit gain in Russia, and strong double-digit growth in the GCC7 countries, Turkey and Egypt, more than offsetting a double-digit decline in Ukraine due to political and economic instability.
• Europe was down 1.0 percent. Pricing in the region was lower, reflecting the pass-through of lower green coffee costs. Lower coffee revenues tempered growth by 1.5 percentage points. Volume/mix increased nearly 1 percentage point despite the impacts of the Easter shift and short-term customer disputes associated with price increases in non-coffee categories.
• North America increased 2.5 percent, driven by continued strong share performance and mid-single digit growth in biscuits. Growth in the category was balanced between volume/mix and pricing. The rate of decline in gum continued to moderate as U.S. market share was up for the third consecutive quarter.

"With a solid first quarter, we remain on track to deliver strong gains in Adjusted Operating Income and Adjusted EPS," said Brearton.

"On the top line, however, growth in our global categories has slowed to around 3 percent over the last two quarters, due largely to the weakness in emerging markets and lower coffee prices. We expect these trends will continue in Q2, likely resulting in top-line growth similar to what we saw in Q1.

"While we expect the pass-through of higher green coffee costs will benefit top-line growth as the year unfolds, we anticipate that the challenging environment in emerging markets will continue and that we may realize some disruptions as we implement our strategic initiatives. As a result, we expect revenue growth to improve modestly in the second half. For the full year, we expect our Organic Net Revenue growth to be in line with global category growth of approximately 3 percent."