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What Would a JAB Holding Company IPO (or Two) Look Like?

JAB Holding Co. owns Panera Bread, Krispy Kreme, Peet's, a variety of coffee brands, and a major stake in Keurig Dr Pepper (NYSE: KDP). The generally closed-lipped company let it be known that it's considering not one but two IPOs. Details have been scarce, but there's a lot of ways these companies might be combined even though JAB has done very little of that.

A full transcript follows the video.

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This video was recorded on March 12, 2019.

Nick Sciple: Let's talk about what's going on with JAB Holdings. In the past couple of weeks, we've got some news out of JAB Holdings. For investors that may not be familiar, JAB Holdings is a private company that owns major stakes in a lot of consumer and restaurant retail brands, things like Panera, Krispy Kreme Doughnuts, Keurig Dr Pepper. They're considering, over the next one to three years, spinning out their restaurant and coffee brands into two separate IPOs.

Dan, instant analysis when we see rumors of this news taking place: What are your thoughts? What should investors be paying attention to?

Dan Kline: JAB has been rolling up brands and kind of doing nothing with them. They own Panera outright. They own Krispy Kreme outright. I can see the reason why they're not selling Krispy Kreme Donuts and Panera. On the other hand, they own, I don't know the exact number but let's call it 20 different coffee brands. Peet's, Douwe Egberts, Tassimo. And when you walk into a Panera, Panera still has generic coffee service. Do you know anyone who has the same fondness for Krispy Kreme Coffee that, say, a Dunkin' fan has for Dunkin' Donuts Coffee?

Sciple: No, I don't. You go to Krispy Kreme to get the donuts. We were talking before that they have a very narrow product offering outside of their donuts. It's coffee, milk, water, that's about it. They haven't used these opportunities to create synergies between the brands.

Kline: So, logically, even if you don't change the Krispy Kreme offering, at least brand it! Have it be Douwe Egbert beans or whatever, get that cross-branding! But, logically, Panera sort of has an espresso coffee and a fake Frappuccino, make that something.

Now, the challenge -- and we've talked about this. In my opinion, it impacts an IPO. The value of any coffee brand that isn't Starbucks or Dunkin' Donuts is very questionable. The argument I made for this is, as some of you know, Capital One has opened cafes. Inside the Capital One Cafe is Peet's, which is a JAB Holdings brand. The Peet's Cafe is not supposed to be a moneymaker, it's supposed to drive the banking business. So at my Peet's, on Monday, Wednesday, Friday from 9:00 to 10:00, coffee is free if you have a Capital One card. What do you think a store should be like when it's three doors down from a Starbucks and it's offering free espresso-based drinks? How would you expect the store to be?

Sciple: You would hope that the company selling free coffee would have some significant traffic right next to the store selling coffee. But my guess is that the actual outcome was not consistent with that.

Kline: [laughs] There's almost never someone else in line. And on a regular day, at any point, if you have a Capital One card, it's 50% off. The prices are already a tiny bit lower than Starbucks. So, let's say, with 50% off, you're at maybe 55% or 60% compared to a Starbucks. And I have to admit, I'm guilty of this. These are stores that you can see one from the other, more or less -- I still go to Starbucks four days out of five. [laughs] And I'm not even saying that's some sort of weird training. But there's a lot for JAB to roll up here. If they IPO, I think you'll see those brands being used smarter.

But what's interesting is doing a restaurant brands and doing a coffee brands takes away the incentive for some of those. They've been testing Einstein Brothers Caribou Coffee, which are both their brands. The way they do it is clumsy, but at least you get the exposure for the products of both. If those are in separate IPOs...maybe they'll have similar management structures? So a lot of questions about what they're going to do.

Sciple: Right, Dan. We're not exactly sure the form this IPO is going to take. It's several years away. I will say, the purpose behind this IPO would be more to cash out for the owners of JAB, more so than to create value on the public markets. That raises the question -- if JAB is selling these to get some cash for its owners, who's going to operate these businesses? Whoever is going to operate these businesses is going to be tasked with, as we mentioned, Dan, making these brands work together in a way that they sing and create more value than each brand does by itself. And we have some question marks there.

Kline: I would think there's going to be some divestitures. On the restaurant side, Panera, Krispy Kreme, even Einstein Brothers Bagels all serve different segments. Maybe you do some cross-pollination of those stores, where there's a nice Panera section in the Krispy Kreme. Maybe not. Maybe you sell Krispy Kreme Doughnuts in your Einstein Brothers Bagels.

But on the coffee side, I would think that they can do what Starbucks did with Tazo. They say, "This is going to be our brand. These are going to be the premium. This is the consumer, this is the mid-level, this is the one we sell to restaurants, and these are the four extra we don't need." And either rebrand those products into things that they're already carrying, or sell those brands off.

Sciple: Dan, you're a guy that really likes his coffee. Really, more so than almost anybody I know, you're passionate about it. You have all the different coffee maker products. And this includes Keurig Dr Pepper, as well as lots of other brands that we've mentioned. As you look out, assuming this IPO takes place of the coffee brands, where are you expecting these brands to fit into the market? Are you bullish on their prospects if they do end up existing on their own, that they can carve out a niche that grows over time? What are your thoughts there?

Kline: This is theoretically the Pepsi of coffee brands. If you're going to have Starbucks, and you're going to have an alternative, Dunkin' is playing in that space, Peet's, which is a JAB brand, they're trying very hard at retail to play in that space. But would you bet on Dunkin', which already has all of these deals, which has the great retail exposure, which is in airports and convenience stores? Or would you bet on this third company? It pushes the top JAB brand into the Royal Crown position. When's the last time you went to a 7-Eleven and saw RC Cola? It's not there. It's a niche player.

Maybe they can compete in some of the restaurants. Restaurants that compete with Starbucks are not necessarily going to want to have branded coffee. But look how many hotels and other places just reflexively are Starbucks licensees. Even if they don't have a Starbucks store, they still say, "We proudly brew Starbucks coffee." I'm not so sure they're going to be eager to replace that with, "We proudly brew Douwe Egbert," which is hard to pronounce and nobody knows what it is.

Sciple: Right. For our listeners, these brands that we're super familiar with coming onto the market can definitely create some opportunities to folks and get us excited. I'll be excited to see, whenever we see the S-1 for these new IPOs, what the strategy is behind the companies and what opportunities they see for expansion. But there are some question marks as to how these brands are going to fit together as public companies, who's going to run them, and then, what the opportunity is for upside over the long term. Any going-away thoughts, Dan?

Kline: I will say, on the coffee side, there is the upside that it seems like their stake in Keurig Dr Pepper -- which is a controlling share, I don't remember the exact amount -- would be rolled into the, call it, its coffee platform company. So, then, they would be able to leverage the Keurig machine and all of the different things. While I don't see Keurig freezing out Starbucks anytime soon, they might not play with as many of the third-party people if they can offer a robust choice within their own brand family.

I still think this should be one company with the best assets combined in the best ways possible instead of two companies. But I wasn't asked! [laughs]

Sciple: [laughs] Yeah. We'll see how things play out when these companies roll off by themselves.

Kline: Just so you know, the timing on this is one to two years. So we are jumping the gun a little bit.

Sciple: Yeah. Definitely something to continue to watch. It's something we're going to follow up on, I'm sure, whenever we get more details.

Daniel B. Kline has no position in any of the stocks mentioned. Nick Sciple has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Starbucks. The Motley Fool recommends Dunkin' Brands Group. The Motley Fool has a disclosure policy.

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