Nestle goes grande for Starbucks in US$7.2B deal.

Pays for right to market coffee products

GENEVA • For years, a smoldering George Clooney would sip his espresso and ask: “Nespresso...what else?” Turns out the answer is: Starbucks.

In the third-biggest transaction in Nestle SA’s 152-year history, the Swiss food giant will spend US$7.15 billion for the right to market Starbucks Corp. products from beans to capsules, marrying its international distribution network with the allure of arguably the biggest name in java.

Nestle won’t get any physical assets in the deal. Instead, Chief Executive Officer Mark Schneider is harnessing the name recognition of Starbucks, with its 28,000 outlets around the globe and massive draw in the U.S. Nestle has struggled there for years with its own products like Nespresso and Dolce Gusto.

Nestle could use a jolt — sales rose at their weakest pace in more than two decades last year. By entering a marketing pact with Starbucks, the Swiss company is revealing the limits to growing with Nescafe and Nespresso.

“Nestle needed a big brand, and they needed one fast,” said Alain Oberhuber, an analyst at MainFirst Bank in Zurich. “Starbucks is the only strong brand in roastand-ground. It’s a rather defensive move — a bit late — but nevertheless, a strategically absolutely vital step.”

Starbucks shares rose less than 1 per cent in New York trading. The company said it will use the deal proceeds to accelerate stock buybacks. Nestle gained as much as 1.8 per cent in Zurich. Its shares have dropped about 7 per cent this year.

Nestlé’s Nespresso portioned-coffee business is one of its largest growth engines, but knock-off capsules — including Starbucks-branded ones — that are compatible with the machines have dented revenue. The new deal will give the Swiss company control of Starbucks capsules, among other products.

It comes as Nestlé’s Nescafé brand of instant coffees has lost market share in four of the past five years, according to Euromonitor.

Starbucks is the secondmost-valuable brand in fast food, according to BrandZ’s Global 2017 report, which estimates its worth at US$44 billion. Schneider agreed to pay 3.6 times sales for the consumer-products business, higher than the average of three times for major global food deals, according to Andrew Wood, an analyst at Sanford C. Bernstein.

“This will be his first big M&A test,” Wood said. “Nestlé’s acquisition track record over the last 10-15 years has been less than stellar.”

Nestlé is making a new offensive in the U.S. a decade after Nespresso renewed a push into that market, enjoying limited success as most coffee drinkers avoid small espressos. Nestlé has been struggling to gain market share in that market, given the prevalence of Starbucks and Green Mountain, which was bought out by Europe’s billionaire Reimann family. Their JAB Holding Co. has spent more than US$30 billion building a coffee empire by acquiring assets such as Peet’s and combining with Mondelez International Inc.’s coffee business.

JAB is the biggest danger for Nestlé, MainFirst’s Oberhuber said. The Nestlé-Starbucks alliance comes just as JAB purchases Dr Pepper Snapple Group Inc. for US$18.7 billion.

Starbucks intends to remain in the K-Cup pod business with JAB’s Keurig and is in talks with the company, CEO Kevin Johnson said on a conference call. Nestlé will take over about 500 Starbucks employees who will remain based in Seattle.

Starbucks will continue to produce packaged coffee and other goods in North America, while Nestlé will be in charge of the rest of the world. Sales will be booked by Nestlé, which will pay royalties to the coffee chain. The agreement adds prospects for growth outside of North America, where Starbucks outlets are less prevalent.

Starbucks sees the deal contributing to profit by 2021 or sooner, and will use proceeds to accelerate share buybacks. The chain expects to return around US$20 billion to shareholders through 2020 via buybacks and dividends.