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TheStreet Open House

Keurig Green Mountain's Deal With Kraft: What's Wall Street Saying

NEW YORK (TheStreet) -- Keurig Green Mountain (GMCR) shares surged 13% higher to $133.01 on Friday after the K-cup provider inked a multiyear licensing deal with Kraft Foods (KRFT) to create pods for its Maxwell, Gevalia, Yuban and McDonald's (MCD) McCafe coffee brands.

The Kraft-branded portion packs -- available this fall -- will come in three options: K-Cup single cup brewers for use in the forthcoming Keurig 2.0 Brewing System; K-Carafe packs, which is optimized to brew four cups of coffee in a specially designed Keurig carafe; and the Keurig Bolt pack, which will brew a half-gallon pot of coffee from a single pack and is targeted to large office and food service locations.

Initially, both Kraft and Keurig will handle manufacturing for single-serving pods, the release said. Eventually, Keurig will become the exclusive manufacturer of Kraft-branded Keurig packs using coffee sourced, roasted, and blended by Kraft. Financial terms of the deal were not disclosed in the press release.

Read More: Don't Expect to See McDonald's Fries in Your Freezer Aisle

Keurig has more than 50 brands and more than 290 beverage varieties currently available through its K-Cup offering.

Here's what Wall Street analysts were saying about the deal on Friday.

Scott Van Winkle, Canaccord Genuity (Buy; $134 PT)

The Keurig system is now complete from the standpoint of enjoying economics on the overwhelming majority of k-cup sales. With all of the major US brands now under license, manufacture or partnership deals of some form or another along with several major private label deals such as Costco, BJs & Target Keurig can focus on growing the system without concern of what percentage of incremental economics its will participate in. Further, an often overlooked benefit of GMCR's partnerships with brands is that while green coffee costs have been the concern of late, the rising participation in economics of brands where GMCR doesn't shoulder the green coffee costs simply mitigates another risk to margins. The Kraft deal, given it was the last remaining brand of any importance for a partnership, is thus worth more to shareholders than simply the incremental economics to GMCR from Kraft's market shares. We are making no changes to our estimates as we need to determine when the economics kick in and Kraft's share at the time, but there is clearly a positive bias to our forecasts.

Akshay S. Jagdale, KeyBanc Capital Markets (Buy: $ PT)

With today's announcement of a partnership with Kraft to bring its coffee brands into the licensed family of brands, we believe GMCR has re-captured most of the 14-15% non-licensed share it had lost over the last few years. Kraft was also by far the largest non-licensed brand in the Keurig compatible system and considered to be the most unlikely to convert. The Kraft partnership is significant on a number of fronts: 1) financially it will move the needle given that Kraft's single-serve sales are estimated to be at least $200 million (or 6% of GMCR's Kcups sales or 4% of GMCR's consolidated sales); 2) it validates the 2.0 launch; and 3) it is a huge win for the consumer (in terms of added choice) and should significantly reduce the risk of product returns for retailers. We would expect the stock to be up significantly on this news.

Read More: How DineEquity's CEO Is Transforming IHOP and Applebee's

--Written by Laurie Kulikowski in New York.

Follow @LKulikowski

Disclosure: TheStreet's editorial policy prohibits staff editors, reporters and analysts from holding positions in any individual stocks.

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