Nestle, Starbucks in US$7b tie-up

> Swiss giant secures rights to sell US coffee chain’s products around the world

ZURICH: Swiss-based food giant Nestle will pay Starbucks US$7.15 billion (RM28.2 billion) in cash for the rights to sell the US coffee chain’s products around the world in a global alliance aimed at reinvigorating their coffee empires.

The deal yesterday for a business with US$2 billion in sales reinforces Nestle’s position as the world’s biggest coffee company tries to fortify its place atop a fastchanging market.

Seattle-based Starbucks said it will use proceeds to speed-up share buybacks and the deal would add to earnings per share 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.

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.

“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 CEO Kevin Johnson.

Coffee is popular with younger customers who have grown up with Starbucks and often seek out smaller brands. 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 US$20 billion in cash to shareholders in the form of 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.

A 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.

Nestle, which will take on about 500 Starbucks employees as part of the deal, says its ongoing share buyback programme 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% of the market. Market leader Starbucks itself only has a 14% share, according to Euromonitor International.

Other big players are growing as well, including Italy’s Lavazza, which is now the world’s No. 3. – Reuters