Nestle buys rights to market Starbucks products at $7.15 billion
What's the story
Swiss food giant Nestle announced Monday it will pay $7.15bn in cash for rights to market Starbucks products around the world, outside of its coffee shops. The agreement gives Nestle, which owns Nescafe and Nespresso brands, a strong platform for continued growth in North America. Nestle is focusing on coffee as the main growth area and has already made some acquisitions in the sector.
Annual sales
Starbucks business covered by deal currently generates $2bn sales annually
Starbucks business covered by deal currently generates around $2bn sales annually and includes coffee beans and ground coffee that Nestle will sell in supermarkets around the world. "This transaction is a significant step for our coffee business, Nestle's largest high-growth category. Both companies have true passion for outstanding coffee and are proud to be recognized as global leaders," said Nestle CEO Mark Schneider.
Information
Deal doesn't include Starbucks' coffee shops and cafes
The deal does not include any of Starbucks' coffee shops and cafes. Around 500 Starbucks staff will join Nestle, the company said, but the operations would continue to be located in Seattle. Both companies would collaborate on innovation and go-to-market strategies.
Historic deal
Starbuck CEO hails the deal as 'historic'
Starbucks President and CEO Kevin Johnson hailed the deal as "historic" and said it would create a "global coffee alliance". Nestle, which has been under intense shareholder pressure to improve its profitability, has begun to reposition itself since Schneider took over last year. Schneider asked Starbucks to focus in on a few areas, like bottled-water, infant-nutrition, and pet care, with coffee a top priority.
Omnipresence
Nestle's Nespresso is omnipresent in Europe
While Nestle's Nespresso and other coffee products are omnipresent in Europe, they have had a harder time catching on in the US. Over the past 15 months, the company has clearly set its sights on high-end coffee brands in North America. It snapped up a majority share in California-based Blue Bottle Coffee last September, and two months later bought Texas company Chameleon Cold Brew.
Fruitful deal
Deal could exceed cost of capital within four years: Analyst
Nestle has sold its confectionary business, handing over its US candy business earlier this year to Italy's Ferrero for nearly $3.0bn. Hailing this deal, analyst Jean-Philippe Bertschy of Vontobel said, "Nestle has once again surprised the market with an unexpected-transaction." He acknowledged "the price might appear expensive, but given the returns, the deal could exceed the cost of capital within three-to-four-years".
Information
Transaction involving deal would be finalized by 2018 end
The transaction, which needs approval from regulators, should be finalized by the end of 2018, Nestle said, adding that the deal should start making a positive contribution to its earnings per share and its growth targets starting next year.