Keurig Green Mountain Inc (GMCR): KO’s Sketchy Investment

Keurig Green Mountain Inc (GMCR): KO’s Sketchy Investment
Keurig Green Mountain Inc GMCR

Keurig Green Mountain Inc (NASDAQ:GMCR) This ought to raise all sorts of red flags for people out there….

The Coca-Cola Company (NYSE:KO) began buying 2.8M shares of Keurig Green Mountain Inc (NASDAQ:GMCR) from May 8th to May 12th chasing the price up from $96 to $110. Keurig Green Mountain averages 2.95M shares traded per day meaning Coca-Cola purchased 2.8M of the 11.8M share traded over that time frame (the 10th and 11th were weekend days) put another way,  Coca-Cola was a partner in 24% of shares traded over that time frame. There was no way they would do anything but drive the price of the stock up as volume on the 8th was 2X normal and on the 13th ~2.5X normal..

Play Quizzes 4

Then, with the benefit of that price rise, on May 12th and 13th Keurig Green Mountain insiders dumped a large % of their holdings in Keurig Green Mountain Inc (NASDAQ:GMCR) here, here, here, here, here in many cases converting options years ahead of schedule (there has been a steady stream of insider selling in Keurig Green Mountain).

On May 13th The Coca-Cola Company (NYSE:KO) filed a 13D/A announcing they held 26M shares, or 16% of the stock in Keurig Green Mountain Inc (NASDAQ:GMCR).

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If fact, The Coca-Cola Company (NYSE:KO) only actually owns 19.5M Keurig Green Mountain Inc (NASDAQ:GMCR) shares and is actually “agreeing to buy” the remaining 6.5M shares from Credit Suisse on Feb 13,2015. Coca-Cola cannot vote those 6.5M shares and Credit Suisse is going to hedge their sale to Coca-Cola between now and then. If this smells (I mean sounds) familiar this is not unlike the Herbalife Ltd. (NYSE:HLF) deal in which they sold convertible bonds today to “agree” to buy back stock later. Because there is an agreement to buy, they both can book the transaction now. In the case of Herbalife the convertible does not get counted as dilution until they convert but the “buyback” that has not yet actually happened does (don’t blame me, I don’t make the rules).

Keurig Green Mountain Inc GMCR

From the The Coca-Cola Company (NYSE:KO) filing on what they are agreeing to buy re Keurig Green Mountain Inc (NASDAQ:GMCR):

The lesser of (a) 6,548,041 and (b) the number of Shares that, together with (x) the 16,684,139 Shares purchased by Counterparty pursuant to the Stock Purchase Agreement with Issuer dated February 4, 2014 and (y) the 2,805,591 Shares purchased by Counterparty through Agent as agent from, and including, May 8, 2014 to, and including, the Trade Date (such Shares described in clauses (x) and (y) and any Shares received by Counterparty in respect of such Shares as a result of stock splits, stock dividends or similar events, the “Owned Shares”), equals 16% of the outstanding Shares, as reported in the most recent report filed by Issuer with the Securities and Exchange Commission containing such information as of such time (rounded down to the nearest whole number of Shares) (the “Ownership Limit”).  If the Number of Shares is less than 6,548,041, then the Calculation Agent may make adjustments to the other terms of the Transaction as appropriate to account for the economic effect of such occurrence.  Notwithstanding any other provision of this Confirmation, the Definitions or the Agreement to the contrary, in no event shall the Number of Shares be increased so that the Number of Shares, together with the Owned Shares, exceeds the Ownership Limit

Also, unless The Coca-Cola Company (NYSE:KO) notifies and gains consent of Credit Suisse (which would require an amended filing), they are locked into their current holdings:

 During the Relevant Period, without the prior written consent of CS, Counterparty and its Affiliates shall not, directly or indirectly (including, without limitation, by means of a cash-settled or other derivative instrument with a hedging, averaging, valuation or similar relevant period that overlaps with the Relevant Period) purchase or sell, offer to purchase or sell, place any bid or limit order that would effect a purchase or sale of, or commence any tender offer relating to, any Shares (or an equivalent interest, including a unit of beneficial interest in a trust or limited partnership or a depository share) or any security convertible into or exchangeable for Shares.

Keurig Green Mountain Inc (NASDAQ:GMCR) Full agreement

Now, I’m not gonna run out here and cry “foul”, but, those who know me know I am not a big believer in coincidence when it comes to this stuff. I typically think if it looks and smells like a pile of shit, it is in fact a pile of shit.

In order for one to believe “nobody knew anything” about Coca-Cola ‘s intention and then acted on this news, one has to believe various Keurig Green Mountain Inc (NASDAQ:GMCR) insiders just happened to hit the perfect day to convert their options (years early) and then sell virtually all of them or The Coca-Cola Company (NYSE:KO) was unaware of the 10b-1 trading plans and just happened to pick the perfect set of days to run the price up and buy shares.

Why did Coca-Cola have to drive the price up before entering the transaction with Credit Suisse Group AG (ADR) (NYSE:CS)? Why not just enter the same deal for 9.4M share vs 6.5M? The Coca-Cola Company (NYSE:KO) is required to buy the shares from CS at a price based on the:

The product of (x) the arithmetic average of the Daily VWAPs for the Exchange Business Days in the Calculation Period, subject to “Valuation Disruption” below, and (y) (A) 1 plus (B) the Forward Price Adjustment Factor.

The Calculation Period is 3 day from the trade date (May 13th) to the Termination Date (Feb 13,2015) or earlier at CS’s determination. So, driving up the price prior to entering the agreement served them no benefit, in fact it started the eventual price determination higher that it otherwise would have. Bottom line is their actions in no way helped their eventual cost.

I’ll leave it to readers to draw their own conclusions from this. All I will say is that if i was a shareholder of either company, behavior like this would terrify me. If they do this in plain sight, what is either doing when we can’t see?  Keurig Green Mountain Inc (NASDAQ:GMCR) seems to be doing anything to drive it’s price up while execs cash out. Remember they originally sold The Coca-Cola Company (NYSE:KO) a 1.25B stake at $76 only to later announce a $1B buyback at >$100.  Both action propped up the price but have questionable long term benefits. This is capital allocation at it absolute worst… Coca-Cola, on the other hand, fresh off Buffett abstaining from voting for its comp package is either a willing partner or oblivious dullard to Keurig Green Mountain Inc (NASDAQ:GMCR)’s actions.

I think either choice is unpleasant for shareholders.

Via ValuePlays

Updated on

Todd Sullivan is a Massachusetts-based value investor and a General Partner in Rand Strategic Partners. He looks for investments he believes are selling for a discount to their intrinsic value given their current situation and future prospects. He holds them until that value is realized or the fundamentals change in a way that no longer support his thesis. His blog features his various ideas and commentary and he updates readers on their progress in a timely fashion. His commentary has been seen in the online versions of the Wall St. Journal, New York Times, CNN Money, Business Week, Crain’s NY, Kiplingers and other publications. He has also appeared on Fox Business News & Fox News and is a contributor. His commentary on Starbucks during 2008 was recently quoted by its Founder Howard Schultz in his recent book “Onward”. In 2011 he was asked to present an investment idea at Bill Ackman’s “Harbor Investment Conference”.
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