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December 8, 2009 4:50 PM

Ropes, Cooley, Gibson Dunn, Simpson in Coffee Wars

Posted by Zach Lowe

Correction, 12/8/09 at 8:20 p.m.: The original post inadvertently misrepresented the amount of the breakup fee as reported by The New York Times and referenced in the third paragraph below. The reference has been updated to accurately reflect the NYT analysis.

The surprisingly intense two-way battle for California-based Diedrich Coffee ended today, when Diedrich (represented by Gibson Dunn & Crutcher) agreed to a $290 million takeover offer from Green Mountain Coffee Roasters (represented by Ropes & Gray). The agreement has ended--for now--a monthlong battle between Green Mountain and Peet's Coffee & Tea Inc. for the right to acquire Diedrich, which specializes in making single-serving coffee packets for use in Green Mountain coffeemakers, according to Bloomberg News.

The news isn't all bad for Peet's, which was represented by Cooley Godward Kronish in the deal. First, the company is keeping its initial $26 per share offer open in case the Diedrich-Green Mountain deal runs into antitrust hurdles. The combined company will control about 85 percent of the domestic market for so-called K-Cups, the individual packet servings used in Green Mountain's Keurig coffee brewers, according to Reuters. (Green Mountain has historically licensed the right to produce those packets to companies--including Diedrich--that it is now trying to acquire.) Peet's hired Simpson Thacher & Bartlett antitrust specialist Kevin Arquit toward the end of last month.

Diedrich will also have to pay Peet's an $8.5 million breakup fee, since Diedrich initially agreed to Peet's early November offer before Green Mountain trumped it. That $8.5 million figure is of note. According to The New York Times' Deal Professor, the breakup fee in this case would normally only be a reduced amount (in this case, $6.4 million), since Diedrich found a second suitor (Green Mountain) during the so-called go-shop period, when Diedrich and its board were allowed to consider competing bidders. But David Lipkin, the Cooley partner who led the Peet's deal team along with partner Kenneth Guernsey, says he drafted the breakup fee documents in such a way as to require that Diedrich close a deal with a second suitor before the end of the go-shop period; Diedrich found Green Mountain before the go-shop period expired on Nov. 23 but did not close the deal until today.

"There's a reason I wrote it that way," Lipkin says. "It wasn't an accident."

Indeed, lawyering for Peet's involved some fairly heavy lifting, according to Lipkin and other sources familiar with the deal. Peet's structured its three offers as combinations of cash and stock, with the amount of one component fluctuating depending on the value of Peet's stock price, according to lawyers and this New York Times write-up. The complicated mechanisms--initially suggested by Peet's financial advisers at Jesse Capital Management, sources say--were intended to make up for the fact that Peet's had access to limited cash financing. The company also sought to cap the amount of Peet's stock in any offer because exceeding a threshold of stock would have triggered a yea-or-nay vote among Peet's shareholders--something Diedrich considered a deal breaker, according to sources who worked on the deal.

Peet's most lucrative offer worked out to about $32.50 per Diedrich share; Green Mountain ended up offering about $35.00 per share and won the bidding, according to Reuters. 

Jane Goldstein, the lead Ropes & Gray partner on the deal for Green Mountain, was traveling and unavailable for comment. John Williams III, the lead Gibson Dunn partner on the deal for Diedrich, did not immediately return a call seeking comment. 

Peet's will keep its original offer of about $26 per share open as antitrust regulators review the Diedrich-Green Mountain deal. Because Green Mountain's offer is all cash, antitrust regulators have only 15 days (instead of the usual 30) from the day the parties file the transaction papers in which to send a second request for information--a request dealmakers don't like receiving, since it could signal the need to make various divestitures. So, stay tuned.

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