When the two companies form a new entity it will have annual revenues of over $7 billion. Mondelez International Inc (NASDAQ:MDLZ)’s restructuring is looking to see an annualized savings of no less than $1.5 billion by 2018.
Mondelez International’s Stake
The new company will be called Jacobs Douwe Egberts and will be based in Holland said the companies in a joint statement today. When completed, Mondelez International Inc (NASDAQ:MDLZ) will hold a 49% stake in the new venture that will allow it to concentrate its efforts on the $81 billion global market and will receive after-tax proceeds of roughly $5 billion.
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The announcement came on the heels of its first-quarter earnings that saw it beat analysts expectations. By sales, Mondelez International Inc (NASDAQ:MDLZ) is the second-biggest coffee company while DE Master Blenders 1753 NV (AMS:DE) is the third largest. Both trail Nestle SA (VTX:NESN) and are expected to remain behind the company that holds 23% of the global market following the combining of the two.
Both companies have a strong presence in Europe as well as in the emerging markets of China and Brazil. Nestlé’s Nescafe brand is the dominant instant coffee on the market while its Nespresso capsule division leads the premium segment. The tie-up should pose more competition for Nestle which declined to comment on today’s announcement.
With more and more people drinking coffee worldwide and coffee prices soaring, the new concern will help both companies make the most of this growing demand by strengthening each company’s marketing, R&D, as well as now having more power with retailers.
Tale of two spin-offs
Prices are on the rise due to a record drought in the world’s largest producer of coffee, Brazil.
Both coffee companies were spun-off from larger food concerns in 2012. D.E. Master Blenders was once a part of Sara Lee while Mondelez split from Kraft Foods Group Inc (NASDAQ:KRFT).
Earlier this year activist investor Nelson Peltz joined the board of Mondelez International Inc (NASDAQ:MDLZ) and has immediately called for cost containment.
The move will also allow Mondelez International Inc (NASDAQ:MDLZ), the maker of Oreo cookies and Ritz crackers to concentrate on its snack food business that accounts for nearly 80% of its revenue annually.
In Peltz’s Q1 letter to investors he stated that:
Our goal is to help the leadership make the changes necessary for Mondel?z to reach its full potential and deliver best-in-class financial performance. Peltz said further, “we are working constructively with other Board members, Irene Rosenfeld and her management team to see that Mondel?z achieves best-in-class operating performance and maximizes shareholder value,” and The company also announced plans to adopt ZBB to right-size its overhead structure, a strategy that we wholeheartedly support. ZBB is equivalent to a “blank sheet of paper” approach to cost cutting that questions the need for, and looks for the most efficient and cost-effective way to carry out, every function across an organization.
Scott Wapner of CNBC reports that Peltz had big involvement in the move, stating ‘the billionaire’s fingerprints were all over the transaction’.