Why Is the Coffee War So Hot?

NEW YORK (TheStreet) -- The battle for Diedrich Coffee(DDRX) is heating up, as Green Mountain Coffee Roasters(GMCR) sweetened its bid today.

Green Mountain announced on Wednesday that it is now willing to pay up to $290 million, or $35 a share, significantly higher than Peet's Coffee & Tea's(PEET) offer of $32.50 a share.

The revised agreement also includes a termination fee between $8.5 million to $11.5 million. If the deal is terminated by either party, under certain circumstances the fee will be payable to Diedrich.

Peet's has until Monday to come up with a better offer.

All of which begs the obvious question: What's the lure of Diedrich? As Stifel Nicolaus analyst Steve West says, it's all about the cups: "The K-cup business is a high-growth industry, surging up to 70% over the last several years."

K-Cups, of course, are packs are used with single-cup brewing systems. Currently Green Mountain owns the licensing rights for K-cups, which means anyone else who makes them has to pay royalties to Green Mountain.

But Green Mountain is not satisfied with just that, and by acquiring Diedrich it would up their market share in the business to 85%.