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%.
Peet's has remained on the sidelines when it comes to K-cups, West says, waiting for technology to improve. Management now wants to take a piece of this lucrative business. "Peet's has the ability to grow Diedrich two to three times over the next several years," West says. The coffee retailer could immediately bring Diedrich into grocery stores and eventually introduce its own Peet's K-cups. So ultimately who will win this coffee battle? "Peet's won't overpay," West says. "I don't think they will match the offer." Instead, they are bringing up anti-trust issues against Green Mountain, which will most likely delay the deal if Green Mountain is selected by Diedrich. Whether or not Diedrich will want to go through the hassle of a deal with Green Mountain, or the deal will fall through once it is reviewed, remains to be seen. -- Reported by Jeanine Poggi in New York Follow TheStreet.com on Twitter and become a fan on Facebook.