Sara Lee (fka SLE)

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Sara Lee serves up fresh coffee brew in Europe



* New Dutch-based coffee group to up pressure on Nestle, Kraft

* DE Master Blenders seen valued around 4 billion euros

* Could have $1 billion to spend on acquisitions - analysts

* Shares expected to be listed in Amsterdam by end June

By Ivana Sekularac and David Jones

AMSTERDAM/LONDON, March 22 (Reuters) - An independent Douwe Egberts coffee company, being spun out of Sara Lee this summer, is set to step up the battle with rivals Nestle and Kraft by expanding into new countries, premium products and possibly making acquisitions.

Analysts believe the new company, to be called D.E. Master Blenders 1753 and listed in Amsterdam by the end of June, could breathe fresh life into its Senseo single-serve brewed coffee system, which competes with Nestle's Nespresso and Kraft's Tassimo coffee systems.

A respected new management team, headed by former executives of Dutch baby food group Numico and brewer Heineken, will be working hard to build Douwe Egberts, an iconic brand in the Benelux countries, into an international force, at a time when its more diversified competitors are fighting on many fronts.

And analysts estimate the new company could have around $1 billion to spend on deals in a still fragmented industry, giving it the potential to surpass Kraft as number two in the world's $58 billion-a-year coffee market.

"A pure play coffee maker will be able to use its equity to raise money and we would expect it to be looking at small add-on acquisitions to expand throughout Europe," said one investment banker who has worked for the big coffee companies.

The new group will be the third biggest coffee maker in the world after Nestle and Kraft, but while Nestle has three-quarters and Kraft half of their sales in instant coffee, the Dutch group has two-thirds of its sales in roast and ground coffees and little presence in the instant market.

A SLEEPING GIANT

Founder Egbert Douwes and his wife opened their first coffee shop in the northern Dutch town of Joure in 1753. The business was bought by Sara Lee in 1978 and to many Dutch people lost much of its connection to its home country.

"I don't consider it a Dutch brand any more. The U.S. company bought it a long time ago. I remember I was pretty upset then, thinking why we have to sell Dutch companies," said coffee drinker Ties Molhoek, 65, a recently-retired public prosecutor.

She added Douwe Egberts is still her favourite coffee, but the group could have done more to improve product quality.

As the Dutch coffee house prepares to return home to where it was founded over 250 years ago, analysts say it will need investment and innovation to halt the slide in its domestic market share where it holds around half the roast coffee market.

"Douwe Egberts is a typical Dutch brand, but it has been a sleeping giant. It needs more excitement. I expect that in the next two to three years the perception of its products is going to change," said analyst Karel Zoete at Rabobank.

He values the new group at around 4 billion euros when it is listed in Amsterdam and expects sales will rise 9.5 percent in the current year as it raises coffee prices, with the company looking to move into faster-growing and more profitable premium ranges.

A new management team set out targets last week to grow annual sales 5-7 percent and improve profit margins, and analysts expect it will focus on its two big success stories, and so will relaunch Senseo and look to expand L'Or espresso.

A CLEARER FOCUS

Senseo generates annual sales of around $400 million but is only available in 10 markets, while L'Or espresso launched in France in April 2010 is only sold in supermarkets in four countries including the Netherlands, Spain and Belgium and accounts for around $100 million of annual sales.

Senseo, launched in 2001 with Philips , competes in the coffee system market with Nestle's Dolce Gusto and Nespresso, as well as Kraft's Tassimo. Sara Lee recently bought out Philips from the venture. .

The company has faced legal challenges from Nestle for producing its L'Or espresso capsules which can be used in Nespresso machines. This litigation continues and could limit expansion into new countries in the immediate future.

However, some analysts think the firm, with coffee and tea operations mainly in western Europe, Brazil and Australia, could benefit from a clearer focus on coffee than its rivals.

"Key competitors like Nestle have their hands in many pies, and we remain unclear about the strategic priorities of coffee at Kraft post spin," said Pablo Zuanic at Liberum Capital.

Kraft said it was to split into two companies in August with one North American grocery business and the other a global snacks business to be called Mondelez, and its coffee business will be in the latter snacks company .

Sara Lee's own split was announced back in January 2011 between its coffee and tea operations while its North American meats business will retain the Sara Lee name. Both companies would be owned by the current shareholders of Sara Lee.

($1 = 0.7582 euros)

(Additional reporting by Roberta Cowan Editing by Mark Potter)

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Keywords: COFFEE SARA LEE EUROPE/



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