Nestle pours $7B into Starbucks deal

Swiss company takes on coffee giant’s products to fuel its low java sales The deal is the third largest transaction in Nestle's history.

GENEVA— For years, a smouldering 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 $7.15 billion (U.S.) 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 such as 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 roast-and-ground. It’s a rather defensive move — a bit late — but nevertheless, a strategically absolutely vital step.”

Starbucks shares gained 3.2 per cent in premarket trading in New York.

The company said it will use the deal proceeds to accelerate stock buybacks.

Nestle rose 1.3 per cent. Its shares had dropped about 9 per cent this year.

Knock-off capsules — including Starbucks-branded ones — have dented one of Nestle’s largest growth engines, its Nespresso portioned-coffee business. The new deal will give the Swiss company control of Starbucks capsules, among other products. It comes as Nestle’s Nescafe brand of instant coffees has lost market share in four of the past five years, according to Euromonitor.

Starbucks is the second-most-valuable brand in fast food, according to BrandZ’s Global 2017 report, which estimates it’s worth $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.

Nestle will take over about 500 Starbucks employees who will remain based in Seattle. Starbucks will continue to produce the coffee products in North America, while Nestle will be in charge of manufacturing in the rest of the world. Sales will be booked by Nestle, which will pay royalties to the coffee chain.

The agreement adds prospects for growth outside of North America, where Starbucks outlets are less prevalent.

The Swiss company gets the rights to sell packaged coffee products in supermarkets, restaurants and catering operations under the flagship Starbucks brand and others including Seattle’s Best Coffee, Starbucks VIA and Torrefazione Italia. The deal includes the Teavana tea brand as well.