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An employee pours a latte art into a cup of coffee in Hong Kong.

(bloomberg)

(Bloomberg) -- JAB Holding Co., the closely held investment firm that’s building a coffee and soft drinks empire, has tapped a simple formula to help it grow: buy now and pay later. Much later.

With Monday’s purchase of Dr. Pepper Snapple Group, the investment firm behind the world’s No. 2 coffee company has made some $58 billion of acquisitions in the past six years. One secret to its success concerns its coffee suppliers, who agree to be paid as many as 300 days after selling the beans.

The lengthening payment terms are unprecedented in the commodities industry, where money in many cases still changes hands shortly after the goods are received. The strategy is squeezing trade houses, from No. 1 Neumann Kaffee Gruppe to Ecom Agroindustrial Corp. and Volcafe Ltd., turning them into bankers supplying credit while leaving JAB cash rich.

“The main purpose of the long payment terms is cash flow,” said Jim Watson, a senior beverages analyst at Rabobank International, a leading financier of the coffee trade. “It just opens up a lot of cash that would be otherwise tied up with suppliers,” helping with acquisitions, he said.

JAB has been striking deal after deal since 2012, buying controlling stakes in companies such as Peet’s Coffee & Tea, Caribou Coffee, and D.E. Master Blenders 1753, now known as Jacobs Douwe Egberts after a merger with Mondelez International’s coffee unit. In 2015, the group acquired Keurig Green Mountain Inc. for almost $14 billion in the coffee industry’s biggest-ever deal. Last year, it snapped up U.S. cafe chain Panera for $7.2 billion.

On Monday, Keurig expanded beyond coffee and breakfast foods to pay Dr. Pepper Snapple shareholders $18.7 billion in cash to add some of the biggest soft drink brands.

“Combined, our nationwide distribution system will be unrivaled,” Keurig Chief Executive Officer Bob Gamgort said on a call with analysts.

Jacobs Douwe Egberts, or JDE, last year pulled even with Nestle SA in terms of retail coffee volumes, though its sales still lag by value, according to data from London-based consumer research company Euromonitor International Ltd. Some traders estimate all companies acquired by JAB may already be buying more green coffee than the maker of Nespresso.

Read more: Keurig to take control of Dr. Pepper in $18.7 billion deal

Alongside its coffee holdings, JAB—run by senior partners Peter Harf, Bart Becht and Olivier Goudet—has invested the fortune of Austria’s Reimann family and other investors’ funds in a range of consumer-goods companies, including fragrance maker Coty Inc. and Reckitt Benckiser Group Plc. 

Four Reimann siblings—Renate Reimann-Haas, Matthias Reimann-Andersen,Stefan Reimann-Andersen and Wolfgang Reimann—each have a net worth of about $4.3 billion, according to the Bloomberg Billionaires Index. 

The rapid expansion into coffee has given JAB growing market influence. Some traders have been asked for up to 300 days of financing, while others provide 260 days, or about three times as long as Nestle typically demands, according to people familiar with the arrangements who asked not to be identified because they fear losing supply contracts. Buyers pay interest on their financed purchases, though rates in Europe remain near historic lows.

Bean Counters

The company doesn’t disclose how much coffee it buys, but traders estimate that JDE alone purchases some 720,000 tons annually. While the cost of coffee varies widely with quality and the country of origin, that would amount to about $1.3 billion a year based on the current price of robusta futures. For milder arabica beans, it would total about $2 billion.

JAB had 4.46 billlion euros ($5.52 billion) of borrowings and 15.72 billion euros of equity at the end of June, along with 798 million euros of cash, its financial statements show. Moody’s Investors Service affirmed JAB’s long-term issuer rating of Baa1 after the Dr. Pepper deal, “citing both the sound strategic rationale of the proposed merger and the improvement that this transaction will bring to JAB's portfolio of investments.”

As the coffee industry consolidates, following the path of the beer industry, traders are getting squeezed. Only the bigger houses are able to provide such extensive financing and tougher competition will end up leading to a concentration of traders as well, said Michael von Luehrte, secretary general of the Swiss Coffee Trade Association, whose members represent more than half of the bean exports from producing countries.

Brewing Consolidation

“What we have seen on the industry side will replicate itself on the trade side,” von Luehrte said. “A lot of companies will have to look at their business models and find out what’s the ideal mix between traditional physical trading, speculative trading and the financing part. But it’s clear that the end users, the roasters, they are demanding today many more services that are more banking-related, trade financing-related.”

“Our extended payment terms have been in place for many years,” said Becht, JDE’s chairman. “JDE as buyers have paid for the extra costs that go along with the extended pay periods, so this cannot be used as an argument for the alleged extra pressure some trading houses might now be experiencing.”

The longer payment terms do carry risks. Sharply higher interest rates or a sudden spike in futures prices could leave traders with losses or stretch their financing needs as hedging costs go up. While JAB has deep pockets, should its financial standing deteriorate banks could pull or tighten traders’ credit lines. And industry consolidation means traders are more exposed to fewer companies.

“The counterpart risk is widely underestimated,” von Luehrte said. “We always think one dimensionally. For instance the market is running up and suppliers at origin are defaulting on us. But it can also be the other way around, that suddenly a roaster is having financial problems.”

(Updates with Moody’s rating affirmation in 13th paragraph.)

--With assistance from Craig Giammona and Christopher Cannon

To contact the authors of this story: Isis Almeida in London at ialmeida3@bloomberg.net, Marvin G Perez in New York at mperez71@bloomberg.net.

To contact the editor responsible for this story: Lynn Thomasson at lthomasson@bloomberg.net, Frank Connelly

©2018 Bloomberg L.P.

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