Connect with us
Advertise With Us

BUSINESS

Nestle To Pay $7.15 Billion To Jump-Start Coffee Business

Published

on


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 in a global alliance aimed at reinvigorating their coffee empires.

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.

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 0.5 percent in early trading, having fallen by more than 8 percent so far this year.

Seattle-based Starbucks, the world’s biggest coffee chain, said it will use proceeds to speed-up 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, but does let Nestle sell Starbucks coffee in individual pods and expand sales of soluble coffee.

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.

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.

In a separate statement, Nestle said it expected the business to contribute positively to its earnings per share and organic growth targets from 2019.

The company source said it would pay market-linked royalties to Starbucks after the initial fee. 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 would remain unchanged.

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

“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 on Friday when the tie-up was first mooted.

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

 


Copyright LEADERSHIP.
All rights reserved. This material, and other digital content on this website, may not be reproduced, published, broadcast, rewritten or redistributed in whole or in part without prior express written permission from LEADERSHIP Nigeria Newspapers. Contact: editor@leadership.ng

In your opinion, between APC and PDP administration, which is better?

View Results

Loading ... Loading ...
Advertisement
Comments
Advertisement

Sign up for our newsletter

Advertisement

Pin It on Pinterest

Share This

Share this post with your friends!