JAB Needs to Wake Up and Smell the Coffee
(Bloomberg Opinion) -- Shooting stars tend to burn out quickly.
That’s a lesson for JAB Holding Co., whose takeovers of everything from Krispy Kreme donuts and Keurig Green Mountain coffee to sandwich chain Pret a Manger have made it one of the global retail sector’s most acquisitive presences in recent years.
What’s concerning is some of the reported background to that departure. Becht stepped down after failing to convince JAB to scale back its takeover ambitions and focus on operational improvements, the Financial Times reported, citing two people with direct knowledge of his decision.
That shouldn’t be taken lightly given his track record. As Benckiser NV chief executive officer in the 1990s, Becht presided over its merger with struggling British consumer goods company Reckitt & Colman to produce Reckitt Benckiser Group Plc, maker of Strepsils, Clearasil and Veet.
From 539 pence a share on its first day of trading, the stock rose more than sixfold until just before his departure was announced in 2011. Return on invested capital nearly doubled during his first five years in charge, and didn’t dip below a handsome 20 percent until he left. JAB, meanwhile, is at its core a private investment office for money held by the Reimann family, billionaire descendants of Benckiser’s founder.
Of course, it’s not unheard of for sixty-something chief executives with storied careers to retire to spend more time on the beach, but the headlong nature of JAB’s expansion makes it worth a closer look.
Private companies that manage a successful acquisition-led growth on JAB’s scale are as rare as hen’s teeth because takeovers so often result in a destruction of shareholder value, while the debt that fuels a deal spree remains stubbornly high. Consider the baleful examples of HNA Group Co. or Steinhoff International Holdings NV if you think buying a lot of companies is a shortcut to greatness.
An initial glance at JAB’s accounts suggests the worst of those fears aren’t justified. While the valuation of the unlisted companies that now form about three-quarters of its financial assets is always going to be a bit of a black box, the methodology at least is clearly stated.
If you reverse-engineer a version of JAB’s cash flow statements to strip out the effects of revaluations and its busy dealmaking, you have a picture of a company that’s turned round early operational outflows to make steady improvements over the past few years, combined with net disposals to shore up its ongoing appetite for financial capital.
That probably supports the investment-grade ratings that Moody’s Investors Service and S&P Global Ratings assign to JAB’s bonds. The June 2029, 2.5 percent paper has traded at a modest premium to par value since it was issued last year and even the May 2028, 2 percent securities have only a modest discount.
With those borrowings all in euros and operations mainly in dollars, JAB stands to benefit so long as the U.S. economy looks stronger than the euro zone, which seems a reliable bet for the moment.
Still, Becht’s departure should be a moment to step back and consider. JAB has cut a swathe through the global consumer industry, but right now its long-term investors would do well to keep the focus on getting its existing assets to throw off cash, so that the next leg of acquisitions can be funded internally.
Debt, like donuts, can look tempting when it’s presented to you on a plate. Circumspect managers know they need to have a little fiber too if they’re to avoid indigestion.
That number involves some double-counting. For instance, JAB was the majority player in a group that paid $14.1 billion to take over Keurig Green Mountain Inc. in 2015. Keurig then bought Dr Pepper Snapple Group Inc. in an all-share deal last year, meaning JAB's owners have contributed relatively little capital to carry out around $30 billion-worth of deals.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
David Fickling is a Bloomberg Opinion columnist covering commodities, as well as industrial and consumer companies. He has been a reporter for Bloomberg News, Dow Jones, the Wall Street Journal, the Financial Times and the Guardian.
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