Nestle and Starbucks Enter Deal to Boost Coffee Business

Nestle, the Swiss-based food giant, is set to pay Starbucks as much as $7.15 billion in cash in exchange for the rights to sell the US coffee chain’s products globally. This is a partnership that aims to rebuff their coffee chains.

The agreement between the two retail giants for a business that sports $2 billion in sales reaffirms Nestle’s position while the biggest coffee company in the world attempts to strengthen its position ahead of the fast-changing market.

Starbucks, based in Seattle, said that the proceeds of the deal will be used to quicken the share buybacks, with the deal adding to earnings per share by 2021 at the latest.

Nestle stated that it believes the deal to sell Starbucks bagged coffee plus drinks adding to earnings by the year 2019, though it will not involve any of Starbucks’ cafes.

The agreement between Nestle and Starbucks came as the highly fragmented consumer drinks category witnesses a series of recent deals.

JAB Holdings, which is the private investment firm of European billionaire Reimann family, has sparked the consolidation wave using a series of deals, which include Douwe Egberts, Keurig Green Mountain, and Peet’s Coffee & Tea, 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 Kevin Johnson, who is the Starbucks chief executive officer.

Starbucks stated that it presently expects to return around $20 billion in cash to its shareholders via share buybacks as well as dividends through 2020 fiscal year.

The coffee company also said that the transaction should add to earnings per share by the end of 2021 fiscal year or sooner. There would also be no change in their currently projected long-term financial goals, according to Starbucks.

Meanwhile, Nestle made a separate statement and said that the business should contribute positively to its earnings per share, as well as to their 2019 organic growth targets.

A source from the company claimed that it would hand market-linked royalties to Starbucks after the initial fee, though it will not purchase industrial assets as part of the deal.

Nestle will take on as many as 500 Starbucks employees as part of the agreement. It also said that its ongoing buyback program would not be changed.

The deal with Starbucks is expected to strengthen Nestle’s standing in the United States. It currently ranks as the number 5 player, sporting less than 5 percent of the market. Meanwhile, Starbucks has only 14 percent share, based on Euromonitor International.

“Nestle is far and away the largest hot drinks company globally, with more in sales than the next five largest hot drinks companies combined,” said Euromonitor analyst Matthew Barry. “However, Nestle’s leadership position is less secure than it once was.”

Last year, Nestle’s new Chief Executive Mark Schneider determined coffee as a strategic area for investments. Nestle is popularly known for Nescafe instant coffee, as well as Nespresso home espresso brewers.

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