January 27, 2023

DealBook: An Investor Creates a Tempest in a Coffee Cup

Green Mountain's headquarters in Waterbury, Vt. The company employs almost 5,000.Herb Swanson/Bloomberg NewsGreen Mountain’s headquarters in Waterbury, Vt. The company employs almost 5,000.

When shares of Green Mountain Coffee Roasters began trading on Monday morning, they held the distinction of being the best-performing stock on a major exchange over the last five years.

Better than Apple. Better than Google. Better than Starbucks.

Then David Einhorn began speaking.

Mr. Einhorn, who became famous after making big and vocal bets against Lehman Brothers before that firm’s collapse, took the podium at an investor conference in Manhattan and denounced Green Mountain as an overhyped and overvalued stock. He unveiled a 110-page slide presentation called “GAAP-uccino” — a wonky pun referencing generally accepted accounting principles — that detailed his negative view.

Within minutes, the company’s shares began to sink. Green Mountain stock dropped more than 13 percent during Mr. Einhorn’s talk before closing at $82.50, down 10.4 percent on the day.


Graphic Graphic: Soaring Price of Green Mountain Coffee

A spokeswoman for Green Mountain declined to comment, citing the Vermont company’s so-called quiet period before its earnings release later this month.

Since October 2006, Green Mountain’s shares have increased more than thirtyfold. Put another way, $1,000 invested in Green Mountain five years ago is today worth about $30,000, according to data provided by Thomson Reuters. After Monday’s swoon, its shares’ five-year performance now ranks second, just slightly behind Questcor Pharmaceuticals.

Still, Green Mountain has a market value of $12.6 billion, making it worth more than large food conglomerates like Sara Lee and ConAgra. It has made Robert Stiller, the founder of Green Mountain, a billionaire and the richest man in Vermont. It has been one of the best-performing stocks for a number of large hedge funds, including JAT Capital and SAC Capital Advisors.

But it has also brought out the short-sellers. As Green Mountain shares have risen ever higher, a group of skeptical investors have bet against Green Mountain. Many of the short-sellers absorbed large losses as the stock continued to spike in value.

David Einhorn called Green Mountain stock overvalued.Peter Foley/Bloomberg NewsDavid Einhorn called Green Mountain stock overvalued.

Mr. Einhorn, who runs the hedge fund Greenlight Capital, criticized Green Mountain for “poor transparency.” He attacked the company’s financials, accusing it of “shenanigans” in how it accounts for acquisitions. The company had previously disclosed a Securities and Exchange Commission inquiry into its accounting practices. Mr. Einhorn also decried what he called out-of-control capital spending that he said was growing much faster than the company’s business.

The battleground over Green Mountain stock centers on the “K-Cup.” In 2006, Green Mountain, a company perhaps best known for delivering a decent cup of coffee at the local gas station, acquired Keurig, a business that manufactured single-cup brewing systems. The Keurig machine brews individual cups in less than a minute from coffee packed into single-use, plastic K-Cup pods.

Last year, more than 85 percent of Green Mountain’s $1.36 billion in revenue came from sales of single-use pods and their brewing systems.

The coffee giants Dunkin’ Donuts and Starbucks have recently joined Green Mountain’s Keurig craze. Each has agreed to sell its own branded K-Cups manufactured by Green Mountain. Dunkin’ Donuts has already begun selling its K-Cups in its stores; Starbucks is expected to start later this year.

Mr. Einhorn pooh-poohed the idea that K-Cups have revolutionized the way Americans drink coffee. He noted that drinking single-serve cups is “the expensive way to drink coffee at home.”

“This is a luxury item that is priced outside the range of many households,” he said.

What is more, Mr. Einhorn said, Green Mountain’s patent on K-Cup technology will expire in about a year, which will open the business to competitors.

Several Wall Street analysts who follow the company disagreed with Mr. Einhorn, whose Greenlight fund is down about 5 percent this year.

“There is not a single argument that Einhorn presented today that couldn’t have been made or wasn’t made a year ago when the stock was at $30 per share,” said Mitchell B. Pinheiro, an analyst with Janney Capital Markets, who has followed the company since 1997 and has a $125 price target on Green Mountain shares.

“This is a real trend and you can prefer to stick your head in the sand and ignore it, but Keurig growth remains strong and will continue.”

Regardless of where the company’s shares end up, Green Mountain’s growth over the last decade has been a bright spot in a weak economy.

The company was founded in 1981 by Mr. Stiller, who made his first fortune a decade before by starting E-Z Wider, a maker of cigarette rolling papers. He tried a cup of coffee at a Vermont ski resort and liked it so much that he bought the roastery and began Green Mountain Coffee Roasters.

He based the company in Waterbury, Vt., the same town where Ben Jerry’s ice cream started. Today, Green Mountain employs nearly 5,000 and pushes a corporate social responsibility platform. The company donates 5 percent of its pretax profits to social and environmental causes.

The stunning price appreciation of Green Mountain’s stock has made Mr. Stiller a billionaire. He appeared this year for the first time on Forbes magazine’s list of the richest Americans. At Monday’s closing price, he and his family own shares worth $1.9 billion. Earlier this year, Mr. Stiller, now a Florida resident, bought a pied-à-terre in Manhattan, purchasing the Upper West Side apartment of Tom Brady, the New England Patriots quarterback, for $17.5 million.

Other longtime senior officers have also become very rich. Frances G. Rathke, the company’s chief financial officer and former C.F.O. at Ben Jerry’s, cashed out about $32 million worth of Green Mountain shares for which she had paid $500,000.

Yet around Waterbury, which suffered severe damage as a result of Hurricane Irene, there are few signs of conspicuous consumption. Old Subaru wagons crowd the Green Mountain company parking lot, many of them sporting tattered “Obama ’08” and “Howard Dean” bumper stickers.

Chad Fry, the general manager of the Reservoir restaurant and taproom, a favorite haunt of Green Mountain employees, said that his customers did not seem to focus on the stock price.

“Let’s put it this way,” said Mr. Fry, pointing toward a television playing college football highlights. “No one’s asked me to change the channel to CNBC.”

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DealBook: Once Vultures, Unwanted Suitors Now Seen as Strategists

A Hertz counter at the San Jose International Airport in California. Hertz offered $2.24 billion for Dollar Thrifty, a deal that is considered unsolicited, but a friendlier approach than that of other corporate suitors in recent months.Paul Sakuma/Associated PressA Hertz counter at the San Jose International Airport in California. Hertz offered $2.24 billion for Dollar Thrifty, a deal that is considered unsolicited, but a friendlier approach than that of other corporate suitors in recent months.

When it comes to deals, attitude matters.

On Monday, Hertz Global Holdings made a new bid for the Dollar Thrifty Automotive Group, offering $2.24 billion — a deal that trumps its earlier offer and a current proposal by the Avis Budget Group.

While the deal is considered unsolicited, Hertz is taking a friendlier approach than other corporate suitors in recent months, a stance that could help the car rental company win over the board of Dollar Thrifty. The company said on Monday that it would review the offer from Hertz.

“We believe that the acquisition of Dollar Thrifty by Hertz would be in the best interests of both companies’ shareholders and of rental car consumers, and that it will accelerate Hertz’s growth opportunities by leveraging the combined brand portfolio and unparalleled value and service reputations of both companies,” Mark P. Frissora, the chief executive of Hertz, said in a statement. “We have today made a superior bid.”

Other deal makers have been far more aggressive of late than Hertz.

After being rejected by Ralcorp Holdings, ConAgra Foods raised its offer for the company to $4.9 billion on May 4. It was rebuffed again.

With the NYSE Euronext committed to a $10.3 billion tie-up with Deutsche Börse, the Nasdaq OMX Group and the IntercontinentalExchange said they intended to take their $11 billion takeover offer for the owner of the Big Board directly to shareholders. If Nasdaq and ICE do put forth a formal offer to NYSE investors, it would be the first hostile deal this year, according to Thomson Reuters.

In some cases, deal makers make unsolicited offers as a way to force reluctant targets to the negotiating table. So far this year, 35 companies have made unfriendly bids, with volume topping $70 billion, based on Thomson Reuters data.

The stigma associated with such deals has dissipated over the years, says Paul T. Weisbrich, a senior managing director at McGladrey Capital Markets. While unwanted suitors were once seen as vultures, many are now seen as astute strategists.

“It has been evolutionary,” Mr. Weisbrich said.

The unsolicited deal for Hertz was about speed.

Hertz made a move for Dollar Thrifty in April 2010, offering $41 a share. A few months later, Avis swooped in with another proposal. Although the board of Dollar Thrifty backed a sweetened deal by Hertz in September, shareholders didn’t agree, paving the way for Avis to move forward.

But the plan by Avis, valued at roughly $1.8 billion now, has remained in flux as the two companies await regulatory approval from the Federal Trade Commission. In the beginning of 2011, the companies said they expected a decision by April. With the deadline past, the chief executive of Avis, Ronald L. Nelson, was more vague in May during an earnings call.

“Sometimes things take longer than one would like,” he said on the call. “While we aren’t ready to talk publicly about our discussions with the F.T.C., rest assured that we have been working hard on this front, and that we remain committed to acquiring” Dollar Thrifty.

Avis declined to comment.

Dollar Thrifty took a more ambiguous tone about the deal, following its earnings announcement. On May 5, the company’s chief executive, Scott L. Thompson, told analysts that it had no agreement, written or verbal, with Avis — and would consider potential offers “in light of the current facts and circumstances at the time.” He added that there was “no assurance any merger terms can be agreed upon in the future.”

Shortly thereafter, Hertz jumped back into the fray. Rather than hashing out new terms with Dollar Thrifty this time around, Hertz made an unsolicited bid to get a deal done faster, according to a person close to the company. On Sunday, Hertz called Mr. Thompson to alert him about the forthcoming offer, so as not to take him by surprise.

Hertz has also tried to pave the way with regulators, ramping up its dialogue with the F.T.C. several weeks ago. To help cement a deal, the car rental company said it was in the process of selling its Advantage brand. Several parties have already expressed interest in the unit, which generates roughly $250 million in revenue, according to the person close to the company.

By offloading Advantage, Hertz is hoping that its remaining businesses won’t overlap as much with Dollar Thrifty, making it an easier sell to regulators. Hertz has said it operates in the premium segment, while the Budget, Dollar and Thrifty brands tend to focus on the lower end of the market.

“We have always known that antitrust considerations would be pivotal in any transaction with Dollar Thrifty, and that a combination of Avis Budget and Dollar Thrifty would face serious antitrust obstacles,” Mr. Frissora said in a statement. “Avis Budget has been unable to produce a viable antitrust remedy, despite an entire year of discussions with the F.T.C. with no end in sight.”

Hertz’s cash-and-stock offer of $72 a share represents a 24 percent premium to the deal with Avis. It is also 26 percent more than Dollar Thrifty’s 90-day average stock price.

“We don’t want to get out ahead” of regulators, Mr. Frissora said in a call with analysts on Monday. “But we are aiming to close before the end of the third quarter.”

Hertz hired Lazard, Barclays Capital, Bank of America Merrill Lynch and Deutsche Bank Securities as financial advisers, and Cravath, Swaine Moore, Debevoise Plimpton and Jones Day as legal counsel.

JPMorgan Chase and Goldman Sachs are working with Dollar Thrifty as financial advisors, and Cleary Gottlieb Steen Hamilton is the legal counsel.

Chris V. Nicholson contributed reporting.

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