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Should Coke buy Keurig Green Mountain?

August 5, 2014: 1:06 PM ET
Coke already owns a 16% stake in Keurig. It might make sense to buy the rest of the company.

Coke already owns a 16% stake in Keurig Green Mountain. It might make sense to buy the rest of the K-Cup company.

The opinions expressed in this commentary are solely those of Paul R. La Monica. Other than Time Warner, the parent of CNNMoney, Abbott Laboratories and AbbVie, La Monica does not own positions in any individual stocks.

Mark Twain allegedly said that you should write what you know. I drink a lot of coffee. So I'm writing today about Keurig Green Mountain (GMCR).

Keurig, the maker of the popular single serve K-Cups and the machines that brew them, has been percolating (sorry!) all year. Shares are up nearly 60%.

The company's sales and earnings continue to grow at a pretty healthy clip. Wall Street is hoping for more solid growth when Keurig reports its latest quarterly results Wednesday after the closing bell.

But the main reason investors are excited is because Coca-Cola (KO) bought 10% of Keurig earlier this year and subsequently raised it to a 16% stake.

Related: Check out some of the other big stock winners of 2014

When the initial investment was announced in February, the two companies also said that Keurig was planning to have K-Cups for Coke products as part of a new Keurig Cold machine.

That's potentially a great way for Keurig to grab new customers and boost its revenue. But it makes me wonder how much longer Keurig will remain an independent company. Should Coke just buy out the remaining 84%?

It makes sense. Coke has a growth problem. The stock is down about 5% this year while rivals Pepsi (PEP) and Dr Pepper Snapple (DPS) are both up.

For the next few years, Coke's earnings are only expected to rise at about a 6% clip annually, according to estimates from FactSet. Pepsi, which benefits from owning a thriving snack food business, and Dr Pepper are forecast to increase at slightly faster rates.

Buying Keurig outright could help get Coke's growth back on track. Analysts are predicting a 16% jump in earnings a year for the next few years for the K-cup maker.

Such a bold move might also quiet some critics of the company who feel that Coke's management team has not done enough to try and juice (Coke does own Minute Maid after all) sales and earnings growth.

Activist shareholder David Winters of Wintergreen Advisers has bashed Coke for an executive compensation plan he has dubbed "outrageous."

Even Coke's biggest shareholder, Warren Buffett's Berkshire Hathaway (BRKA) (BRKB), has been somewhat lukewarm in its endorsement of Coke lately.

Berkshire controversially chose to abstain from a shareholder vote regarding Coke's compensation plan instead of voting against it. But Buffett has said in numerous interviews that he felt the plan was "excessive" and that he has let CEO Muhtar Kent know that.

Related: Buffett defends Coke decision

Of course, buying the remainder of Keurig would not come cheap. The 84% Coke doesn't already own is currently worth about $16.2 billion. So Keurig investors may have to wait awhile before Coke makes another move.

A full-blown Coke takeover may not happen until SodaStream (SODA), the do-it-yourself carbonated beverage maker, makes a deal of its own.

There have been numerous rumors since the Coke-Keurig investment about how SodaStream may now need to seek a partner. Pepsi and Starbucks (SBUX) have been named in reports as potential acquirers or investors. But the latest scuttlebutt is that SodaStream may look to go private.

Related: SodaStream pops on sale rumors

If SodaStream actually sells itself to a strategic partner -- i.e. a potential Coke competitor as opposed to a private equity firm -- then Coke may feel that it's time to pounce on Keurig sooner rather than later.

Coke has made some interesting deals lately to expand beyond its core product line of carbonated beverages.

It bought Vitaminwater maker Glaceau in 2007 for $4.1 billion. And it bought Honest Tea in 2011 -- three years after Coke first acquired a 40% stake in that company. So there is also a precedent here for Coke purchasing companies that it invests in.

Keurig investors seem to realize that a deal may happen at some point. And that's why the stock is probably now a very risky one to bet against. Many short sellers, who profit when a stock goes down, had ganged up on Keurig in recent years.

Related: Keurig coffee coming to Subway

Hedge fund manager David Einhorn of Greenlight Capital has been the most notable (and vocal) Keurig bear. He's been skeptical of the company's accounting and once amusingly dubbed it GAAP-uccino in a presentation. (Nothing like a pun about finances and caffeinated beverages to make this coffee lover happy!)

But the spike in Keurig's stock has come at the expense of short sellers. And they have largely bailed on their bets against the stock -- even though it is still sporting a pretty pricey valuation of nearly 30 times fiscal 2015 earnings estimates.

As recently as mid-November, nearly 42 million Keurig shares were held short, according to figures from Nasdaq. Now there are only about 9.6 million shares being held short.

So while it would be a little too glib of me to say that Keurig's earnings on Wednesday don't matter at all, the K-Cup maker's story really isn't about quarterly results anymore.

It's all about waiting for when Coke may finally buy the rest of the company. Maybe you should consider "one more cup of coffee" for your portfolio? Best song about the tasty beverage. I really like the covers by The White Stripes and Robert Plant. But nothing beats the original. Sing it, Mr. Zimmerman! And Emmylou Harris!

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