Nestle to Pay Starbucks $7.15 Billion in Global Coffee Alliance

Nestle shares rose 1.4 percent by mid-session, having fallen by more than 8 percent so far this year.

(Photo: Reuters/Altered by The Quint)

Swiss-based food giant Nestle will pay Starbucks $7.15 billion in cash for the rights to sell the US coffee chain's products around the world, tying a premium brand to Nestle's global distribution muscle.

The deal on Monday, 7 May, for a business with $2 billion in sales reinforces Nestle's position as the world's biggest coffee company as it 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.

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.

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.

The agreement will strengthen Nestle's position in the United States, where it is the number 5 player with less than 5 percent of the market. Market leader Starbucks has a 14 percent share, according to Euromonitor International.

In the US, 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.

Erik Gordon, 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."

(The Quint is now on WhatsApp. To receive handpicked stories on topics you care about, subscribe to our WhatsApp services. Just go to TheQuint.com/WhatsApp and hit send.)