Nestle to pay Starbucks $7.15 billion in global coffee alliance

LONDON/ZURICH (Reuters) – Swiss-based food giant Nestle will pay Starbucks $7.15 billion in cash for the rights to sell the U.S. coffee chain’s products around the world, tying a premium brand to Nestle’s global distribution muscle.

The deal on Monday for a business with $2 billion in sales reinforces Nestle’s position as the world’s biggest coffee company tries to fortify its place atop a fast-changing market.

It is a bold stroke by new Nestle Chief Executive Mark Schneider, who has made coffee a strategic priority as he tries to convince uneasy shareholders, including activist Third Point, that he can boost the sprawling group’s performance.

Bernstein analyst Andrew Wood said that Nestle’s third-biggest acquisition would allow the Swiss company to expand the brand through its global distribution network.

Nestle shares rose 1.4 percent by mid-session, having fallen by more than 8 percent so far this year. Starbucks stock was indicated 2.8 percent higher.(Nestle and Starbucks shares: reut.rs/2If7WvF)

Seattle-based Starbucks, the world’s biggest coffee chain, said it will use proceeds to speed share buybacks and the deal would add to earnings per share (EPS) by 2021 at the latest.

Nestle said it expects the deal to sell Starbucks bagged coffee and drinks adding to earnings by 2019. It will not involve any of Starbucks’ cafes or ready-to-drink products.

But it does let Nestle sell Starbucks coffee in individual pods — as it does now with Nespresso and Nescafe — and expand sales of Starbucks soluble coffee, a key market in Asia. Starbucks now sells single-serve coffee in Kuerig K-cup pods.

The Nestle name will not appear on Starbucks products. “We do not want the consumer to perceive that Starbucks is now part of a bigger family,” a Nestle source said.

Starbucks, strong mostly in the United States, will have the final say on expanding its product range.

“This global coffee alliance will bring the Starbucks experience to the homes of millions more around the world through the reach and reputation of Nestle,” said Starbucks Chief Executive Kevin Johnson.

Nestle and Starbucks are joining forces in a highly fragmented consumer drinks category that has seen a string of deals lately.

JAB Holdings, the private investment firm of Europe’s billionaire Reimann family, has fueled the consolidation wave with a series of deals including Douwe Egberts, Peet’s Coffee & Tea and Keurig Green Mountain, narrowing the gap with Nestle.

RICHER BREW

Coffee is popular with younger customers who have grown up with Starbucks. A willingness to pay up for exotic beans and specialty drinks means companies can brew up richer profit margins than in mainstream packaged food.

Starbucks said it now expects to return approximately $20 billion in cash to shareholders in share buybacks and dividends through fiscal year 2020.

It said the transaction was expected to add to earnings per share by the end of fiscal year 2021 or sooner, with no change to the company’s currently stated long-term financial targets.

Nestle said it expected the business to contribute positively to earnings per share and organic growth targets from 2019.

The company source said it would also pay market-linked royalties to Starbucks. It will not buy any industrial assets as part of the deal, but could step in to produce in markets where Starbucks is not present.

Nestle, which will take on about 500 Starbucks employees, said its ongoing share buyback program remained unchanged.

The agreement will strengthen Nestle’s position in the United States, where it is the No. 5 player with less than 5 percent of the market. Market leader Starbucks has a 14 percent share, according to Euromonitor International.

“In the U.S., Nescafe is seen as a downscale brand for older people, and the Nespresso system as a niche product. Starbucks is the quality, mass-market leader,” said Erik Gordon at the Univesity of Michigan’s Ross School of Business.

“Nestle is far and away the largest hot drinks company globally, with more in sales than the next five largest hot drinks companies combined,” Matthew Barry, an analyst at Euromonitor, said when the tie-up was first mooted on Friday.

“However, Nestle’s leadership position is less secure than it once was.”

COFFEE IN FOCUS

Other big players are growing as well, including Italy’s Lavazza, which is now the world’s No. 3.

Nestle CEO Schneider last year identified coffee as an area of investment.

It bought Texas-based Chameleon Cold-Brew in November and took a majority stake in Blue Bottle Coffee, a small upscale cafe chain, in September.

Starbucks, which in April reported a global drop in quarterly traffic to its established cafes, has been revamping its business amid competition in its key home market. It sold its Tazo tea brand to Unilever for $384 million and closed underperforming Teavana retail stores.

Starbucks is rapidly expanding in China, which it expects to one day be its largest market. It also plans to open 1,000 upscale Starbucks Reserve stores and a handful of Roastery coffee emporiums to take on high-end coffee rivals such as Intelligentsia Coffee & Tea and Blue Bottle.

Starbucks has long farmed out the retail distribution of its packaged products to a company more specialized in that process, but the partnerships have not always been smooth.

Nestle, the world’s largest packaged food company, is also not shy when it comes to partnering with rivals through licensing deals or joint ventures, having reached arrangements with General Mills’ and Hershey, among others.