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$7.15 Billion To Be Paid To Starbucks By Nestle For The Former’s Bagged Coffee Business

$7.15 Billion To Be Paid To Starbucks By Nestle For The Former’s Bagged Coffee Business
Nestle has bagged a premium brand to its global business by obtaining the rights to sell and market Walmart’s products around the world. The Swiss-based food company will pay the U.S. coffee chain $7.15 billion in cash for this deal.
The deal was announced on Monday. The business for which Nestle agreed to pay the amount generates an average of $2 billion in sales revenue. The deal has placed Nestle as the biggest coffee company in the world.
Nestle has made coffee a strategic priority under the new Nestle Chief Executive Mark Schneider.
Nestle would be able to distribute the new acquired business through its robust global distribution network and thereby expand the brand, said Bernstein analyst Andrew Wood.
After falling through more than 8 per cent this year, the shares of Nestle increase dvaleu by 1.4 per cent after the news. There was a 2.8 per cent increase in the shares of Starbucks.
Seattle-based Starbucks would be able to add to its earnings per share (EPS) by 2021 at the latest because of the deal and the money form deal would be put to use to make share buybacks.
On the other hand, Nestle expects to add to its earnings by 2019 from the additional revenues generated form the sale of Starbucks bagged coffee and drinks. None of the cafes or the ready-to-drink products of Starbucks are involved in the deal.
But nestle would be able to sell Starbucks coffee in individual pods under the deal. At present, Nestle sells such coffee through its Nespresso and Nescafe brands.
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.
On the issue of expansion of product range would be the exclusive prerogative of Starbucks.
“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.
There has bene a string of deals in the consumer drinks category and the deal between Nestle and Starbucks is in line with the current trend in the segment.
By fiscal year 2020, about $20 billion is expected to be given away to shareholders in cash by Starbucks through share buybacks and dividends.
The deal would not impact the currently stated long-term financial targets of Starbucks, the company has said, and it is anticipating that there would be addition to the earnings per share by the end of fiscal year 2021 or even earlier.
About 500 employees of Starbucks would be taken into its fold by Nestle.
“In the U.S., 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,” said Erik Gordon at the 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.

Christopher J. Mitchell

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