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Krispy Kreme

Private investment firm, JAB Holdings announced Monday it was buying Krispy Kreme Doughnuts Inc. (:KKDN/A) for $21 a share, a 25% premium over KKD’s average closing price over the past 20 sessions.

The deal works out to $1.35 billion worth of doughnuts, a lucrative deal for Krispy Kreme stockholders, depending on the price they paid for their stock initially.

Related: Benzinga Ratings Announcement

Shorts Blindsided

One group of traders, those who began shorting the stock recently, were caught off guard and did not see the JAB deal on the horizon.

Short interest grew almost 6% after Krispy Kreme stock rallied despite disappointing Q4 sales. Bloomberg suggested the takeover by JAB is likely causing what it called a “mini-squeeze” as short sellers are forced to close out of their short position at a loss.

Signals Were Sent

It was about a year ago that the company eliminated a takeover-defense mechanism it had adopted in 2013. This was seen as a sign the company may be open to a takeover bid.

At that time analysts speculated that Jollibee Foods would be a likely buyer. That deal never happened and takeover talk fell away.

Coffee & Doughnuts

JAB, which declined to discuss future plans, did say it planned to take Krispy Kreme private. Industry observers suggested JAB might team Krispy Kreme up with one or more of its coffee brands.

This speculation is based on the fact the company, which also owns Einstein Bros. Bagels and Caribou Coffee, has merged those two brands in some areas in stores labeled simply “Coffee & Bagels.”

Analyst Downgrades

Stephens downgraded Krispy Kreme from Overweight to Equal-Weight following announcement of the buyout offer from JAB.

Said analyst Will Slabaugh, "We like the valuation of this deal (over 16x '16 EBITDA), which is expected to close at some point in the third quarter, and do not currently look for any competitive bids."

Wedbush downgraded the stock from “Outperform” to “Neutral” and Roth Capital dropped its rating from “Buy” to “Neutral.”

Who’s Next?

With no indication of a takeover war for Krispy Kreme, Wall Street immediately began guessing who might be next in breakfast M&A. Shares of one possible target, Dunkin Brands Group Inc. (NASDAQ:DNKNC), rose $0.60 or 1.3% Monday on volume of 1.6 million shares versus 3-month average volume of about 1.5 million shares.

Jim Cramer’s TheStreet has a “Hold” rating on DNKN with a grade of C+. Woo Trader has a “Perform” rating on the stock, Zack’s rating is “Hold” and TipRanks rates DNKN a “Buy.”

Related: One Brick-And-Mortar Chain Keeps On Growing

A Challenge But Not Really

Cramer said the JAB buyout of Krispy Kreme along with the right coffee pairing could present a competitive challenge to both DNKN and Starbucks (NASDAQ:SBUXD).

"JAB is really putting together an amazing conglomerate. They want to own the morning," Cramer said.

Despite this, Cramer noted, "In the end, coffee is a growth market, so I don't think this deal will hurt anyone."

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