kdcltd.com kane davis cooper – Swiss-based food giant Nestle will give Starbucks over $7 billion in cash for the rights to sell the Seattle based coffee chain’s products around the world in a global alliance aimed at strengthening their coffee empires.
The deal for a business with $2 billion in sales reinforces Nestle’s position as the world’s biggest coffee company tries to strengthen its place in a fast-developing marketplace.
US-based Starbucks said it will use funds to hasten share buybacks, and the deal would add to eps in the next three years.
The Vevey, Vaud, Switzerland company said it anticipates that the deal to sell Starbucks bagged coffee and drinks will add to earnings by next year. It will not include any of Starbucks’ outlets.
Nestle and Starbucks are coming together in what is a highly disjointed consumer drinks market that has seen a number of deals recently.
JAB Holdings, the private investment firm of the billionaire Reimann family, has powered the merger activity with a chain of deals including Douwe Egberts, Peet’s Coffee & Tea and Keurig Green Mountain, closing the gap with the Swiss company.
“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,” announced Starbucks CEO Kevin Johnson.
Coffee is fashionable with younger people who have grown up with Starbucks and often look out for smaller or more independent brands. A readiness to pay extra for out of the ordinary beans and speciality drinks means companies can percolate bigger profit margins than in conventional packaged food.
Starbucks said it now anticipates returning around $20 billion in cash to shareholders by share buybacks and dividends through 2020.
It said the deal was predicted to increase eps by the end of 2021 or before, with no change to the company’s present long-term targets.
In a separate statement, Nestle said the deal would add positively to its eps and organic growth targets from next year.
A Nestle representative said it would pay market-linked royalties to Starbucks after the initial payment.
Nestle, which will engage around 500 Starbucks employees as part of the agreement, says its ongoing share buyback program would stay as it is.
The deal will boost Nestle’s position in the US, where it is currently in fifth position with under five percent of the overall market. Top of the board Starbucks itself only has a fourteen percent share.
Nestle is by far the biggest hot drinks company in the world, with higher sales than the next five biggest hot drinks companies put together although Nestle’s position in front of the pack is not as dominant as it once was.
Other big players are coming up in the ranks too, including Italy’s Lavazza, which is now the world’s number three.
Nestle’s CEO, Mark Schneider last year acknowledged coffee as a strategic area for investment for the company known for its instant coffee.
It purchased Texas-based Chameleon Cold-Brew at the end of 2017 and took a majority stake in Blue Bottle Coffee, a small upscale cafe chain, two months before that.
Nestle is under shareholder pressure to better its performance, which has suffered for years as consumers flock to newer, more fashionable brands.
Starbucks, which in April reported a global drop in quarterly traffic to its established cafes, has been revamping its business as it battles high and low-end competition in its key home market. It sold its Tazo tea brand to Unilever for $384 million and closed underperforming Teavana retail stores.
Privately held Acosta bought that business in 2011 after Starbucks cited brand mismanagement and ended more than a decade-long relationship with Kraft Foods.
The cafe chain’s deal with Kraft had been due to finish in 2014, but Starbucks took an early exit and was later forced to pay $2.76 billion to Kraft, which by then had split into two. The payment went to Mondelez International. Starbucks has long handed over the distribution of its products to companies more specialised in that process, but the arrangements have not always worked out as hoped.
Nestle, also the world’s largest packaged food company, is also not averse to linking up with competitors, either via licensing deals or joint ventures.
Nestle sells General Mills’ Haagen-Dazs products in the US, and Hershey sells Nestle’s KitKat in the US. Nestle also has a joint agreement with General Mills for cereal, Lactalis for dairy products and R&R for ice cream.
Starbucks is expanding business in China, which it expects to one day be its biggest market. It also plans to open 1,000 upscale Starbucks Reserve stores and a small number of Roastery coffee emporiums as part of a broader plan to defend against high-end coffee rivals such as Intelligentsia Coffee & Tea and Blue Bottle.