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Sunday, 14 April 2013

CEO Jan Bennink of DE Masterblenders: Corporate Vulture or Shareholders’ Hero?

It was only one year ago when the immemorial Dutch coffee brand ‘Douwe Egberts’ was released from a unhappy marriage with the American company Sara Lee Corporation.

Douwe Egberts, the Dutch ‘Maxwell House’, and active in the coffee industry since 1753, initiated an IPO at the NYSE/Euronext Amsterdam stock exchange, as a ‘happy single’ under the pompous name DE Master Blenders 1753 NV (DE:NA).

Douwe Egberts had been the best sold coffee and tea brand in The Netherlands for ages. Through its smart customer loyalty program (‘saving value points on coffee and tea in exchange for free gifts at the DE gift shop’) going back for decades, it had bound millions of loyal customers who only drank Douwe Egberts coffee and Pickwick tea.

About 12 years ago in 2001, the company created a sales monster with the hugely successful Senseo coffee machines and coffee pads, which gave their customers the ‘look and feel’ (albeit not the taste) of espresso coffee, for the price of little more than filter coffee. The clever and beautiful, ‘no frillz’ design of the coffee machines and the easy-to-use coffee pads hit the Dutch and foreign coffee markets like a hammer.

However, a few years ago, the party seemed slightly over for Douwe Egberts.  According to some analysts, this was a consequence of Sara Lee underinvesting in the valuable brand.

The ‘trendy’ Senseo coffee got out-of-fashion and, on top of that, the coffee pads were not protected by copyright. This allowed all supermarket chains and other coffee brands to produce their own coffee-pads, thus eroding the profits for Douwe Egberts.

Besides that, the brand had obviously missed the boat at the vast market for luxury espresso coffee, in comparison with the hugely successful and highly profitable espresso-coffee formula ‘Nespresso’ of its main competitor Nestlé.

Although Douwe Egberts generally sold coffee of good quality and still counted many loyal customers, their espresso coffee had never been so famous, expensive and good as Illy coffee, not so Italian as Lavazza or Segafreddo coffee and not by a million miles as trendy, innovative and profitable as Nespresso coffee, which had been sold for 'top dollar' per pad.

Summarizing, the brand had in fact a quality, innovation and image issue. However, that would all change after the company would stand on its own two feet again…

Under the leadership of CEO-at-the-time Michel Herkemij and chairman of the supervisory board Jan Bennink, the brand had the ambition of becoming the worlds No. 2 coffee brand. 

Things went… a little different.

Shortly after the IPO, a bookkeeping scandal occurred at the branch of DE in Brazil. Profits there had been rigged by the local management, which meant that millions in losses had to be taken by the main corporation.

And also in The Netherlands, a scandal occurred in October 2012: the word was spread by CEO Michel Herkemij himself, that the coffee brand had structurally put 0.5 grams less coffee in the pads than it ought to: 7 grams instead of 7.5 grams. 

This fraudulent behavior of the company towards the customers had lasted for years and years, saving the company millions of euro’s, but eventually abusing the trust of their very loyal customers and shareholders (see the chart).

Stock rates for DE Master Blenders since mid-2012
Chart courtesy of Bloomberg
Click to enlarge
The result of these scandals and the lack of good news was that the stock rate of DE Master Blenders hovered between the €9 and €10 for almost a year, never quite living up to the ambitious promises of its executive managers.

In December of last year, chairman Jan Bennink suddenly pulled a rabbit out of the hat: CEO Michel Herkemij was fired and Bennink's ambition suddenly changed to selling DE Master Blenders to a foreign party.

During the first months of 2013, negotiations were started between DE and JAB. JAB, an abbreviation for Joh. A. Benckiser, is an investment company, closely attached to the family behind the German brand Reckitt Benckiser: the family Reimann. Reckitt Benckiser is a large company, which produces washing detergents and all other kinds of household products.

Last week, the news was spread that JAB offered an official €12.50 per share for DE; about 30% above the stock rate of DE in March, 2013 and about €0,45 above the stock rate during April. Previously, JAB had offered slightly more money for the DE stock (€12.75), but for further undisclosed reasons, this previous offer had been withdrawn.

The following snips come from Bloomberg:

Joh. A. Benckiser, the investment arm of the billionaire Reimann family, agreed to buy D.E Master Blenders 1753 NV (DE) for about 7.5 billion euros ($9.8 billion) to build a coffee conglomerate in the industry’s biggest deal ever.

JAB will pay 12.50 euros a share, the companies said in a statement today, less than the price the parties disclosed they were discussing last month. Amsterdam-based Master Blenders’ board supports the offer, it said in the statement.

The purchase of the Senseo maker, which was spun off by Sara Lee Corp. last year, will give JAB a platform to expand its coffee business both organically and by acquisition, JAB Chairman Bart Becht said today. JAB agreed to buy U.S.-based coffee chains Peet’s Coffee & Tea Inc. and Caribou Coffee Co. for more than $1 billion in total last year.

While the offer is lower than originally suggested, “it certainly looks like a fair price,” said Jon Cox, an analyst at Kepler Capital Markets in Zurich. “I presume JAB’s idea is to establish a global coffee company, something hybrid between Starbucks and Nestle/Nespresso. Competition will be pretty intense between companies.”

Master Blenders shares fell 1 percent to 12.11 euros at the close of Amsterdam trading. JAB and Master Blenders announced on March 28 that they were in discussions that could lead to a deal at 12.75 euros a share, triggering a 25 percent advance for the stock that day.
Master Blenders interim Chief Executive Officer Jan Bennink today attributed the lower price to due diligence in an interview posted on the company’s website.

“In any due diligence process, there’s a couple of positives, there’s a couple of negatives and in the end, we came to an agreement that 12.50 euros is the correct price,” Bennink said in the interview. The deal gives Master Blenders a total value of 36 times earnings before interest, taxes, depreciation and amortization, according to Bloomberg data. JAB’s purchase of Peet’s valued that business at 22 times Ebitda.

And now we come to the title of this article. Jan Bennink was the former CEO of Dutch food and nutricion company Numico, until the company was sold to the French dairy company Danone. Bennink had been the president of Sara Lee’s supervisory board and he has stepped over to DE Masterblenders in 2012, ‘promising to make it the world’s number 2 coffee brand’.

In reality, Jan Bennink has not done very much for the brand, except for cutting costs in the company and reorganizing it, and – according to the Dutch labour unions FNV Bondgenoten, CNV and De Unie – ‘scaring the shit out of the employees’:

According to the labour unions, there has been a lot of unrest during the last half year, due to the reorganization of the company. As a consequence, employees fear losing their job and they are afraid to be briefed for criticizing the management of the company. They are also scared to call in sick, in spite of the high workload in the company.

Nicole Boonstra, manager of FNV Bondgenoten, blames the circumstances on DE Masterblender’s CEO Jan Bennink. ‘He set course for a take-over of the company and did not allow anybody to alter this plan’, according to Boonstra

And now it is cashing time: by making the DE Master Blenders company ‘lean and mean’, through reorganizing it and cutting costs everywhere, Bennink has written himself a check of €12.5 million.

He will earn this money in the deal of DE with JAB, by selling his shares to the German investment company. Of course, this amount is petty cash, compared to the €87,4 million that Bennink earned in 2007, by selling his company Numico to Danone.

The question is now: is Jan Bennink a vulture, who scavenges on ‘empty promises’ and the revenues coming from a good company? A company, which is temporarily in heavy weather, but has in theory a bright future ahead?

Or is he a smart business-man, who earned the shareholders in general a nice premium of €2-€3 on their investments?

I tend to go for the former description…

I personally don’t like chief executive officers very much, who take the money and run, instead of trying to make their company really better in its own right.

He earned some money for the shareholders by cutting costs, but not by structurally changing DE Master Blenders into a better company, with products that attract many new customers, while maintaining the old ones. 

The workers, after a difficult year of reorganizations, will have an uncertain future ahead, as they don’t know what the future will bring under JAB. 

However, things might turn for the better, anyway: the people behind JAB have been very succesful in their own detergent and cleaning product industry and they might turn DE Master Blenders back into a money-machine, famous for innovation, good products and tasty coffee. Time will tell...

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