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Mon 7 May 2018 09:54 AM

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Nestle enters $7.2bn coffee alliance with Starbucks

Nestle expects the deal to contribute positively to its earnings per share and organic growth targets as from 2019

Nestle enters $7.2bn coffee alliance with Starbucks
Starbucks said it will use the proceeds to accelerate share buybacks, now expecting to return about $20 billion through repurchases and dividends through fiscal 2020. Nestle plans to use the Starbucks brand in its Nespresso and Dolce Gusto capsule systems, the Seattle-based company said.

Nestle agreed to enter an alliance with Starbucks to market the coffee chain’s consumer and food-service products globally in a first tie-up of major rivals in the java market.

Nestle will pay Starbucks $7.15 billion upfront in cash for a business that has annual sales of $2 billion, the Swiss company said in a statement Monday. Nestle expects the deal to contribute positively to its earnings per share and organic growth targets as from 2019.

Starbucks said it will use the proceeds to accelerate share buybacks, now expecting to return about $20 billion through repurchases and dividends through fiscal 2020. Nestle plans to use the Starbucks brand in its Nespresso and Dolce Gusto capsule systems, the Seattle-based company said.

The alliance underlines Nestle’s efforts to capture more upscale java drinkers in the US, where the maker of Nespresso and Nescafe has been outpaced by JAB Holding Co. 

The investment company of Europe’s billionaire Reimann family has spent more than $30 billion building a coffee empire by acquiring assets such as Keurig Green Mountain and Peet’s.

“With Starbucks, Nescafe and Nespresso, we bring together three iconic brands in the world of coffee,” Nestle Chief Executive Officer Mark Schneider said in the statement.

About 500 Starbucks employees will join Nestle. Operations will continue to be located in Seattle. Nestle said its ongoing share-buyback program will remain unchanged.

The agreement is subject to customary regulatory approval and is expected to close by the end of 2018. The agreement excludes ready-to-drink products and all sales within Starbucks coffee shops.

While Starbucks holds the crown in the $13.8 billion US coffee market, Nescafe and Nespresso hold the top ranks globally, according to Euromonitor.

Starbucks has been examining each of its businesses to streamline its operations and focus on those that add most to sales and profit, Chief Financial Officer Scott Maw said on a conference call in January.

Nestle added niche brands Blue Bottle Coffee and Chameleon Cold-Brew last year to expand its portfolio in the U.S. Nespresso also introduced a machine that’s more attuned to Americans’ preference for bigger cups of joe several years ago.

Starbucks in November agreed to sell tea brand Tazo to Unilever for $384 million.

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