According to the latest news report by Bloomberg, the 152-year old Swiss food giant is buying the rights to market Starbucks in a deal that is the third biggest in its entire history. Nestle will be paying a massive $7.15 billion for this deal.
According to this deal, Nestle will have the rights to market Starbucks products, from beans to capsules, all over the world, outside of the company’s own coffee shops. Starbucks is, by far, the most recognizable name in coffee business anywhere in the world. The company has more than 28,000 outlets across the globe and is also the market leader in North America. This deal is still pending regulatory approval at this time.
However, if the deal does come through, then Nestle will get the boost it needs in the North American region, where its sales have been the lowest in 2017 in the last 20 years. The Swiss giant has been struggling to find market acceptance for its own coffee brands, Nespresso and Dolce Gusto, and by entering this deal, the company is showing the limits to which it can grow its own brands.
According to MainFirst Bank analyst Alain Oberhuber, Nestle needed a strong brand as soon as possible and Starbucks is pretty much the only brand in the roast-and-ground segment. He feels that this deal is a strategically critical step for the Swiss food company, though maybe it should have come a little sooner.
Starbucks saw a less than 1% increase in its share prices after this announcement and announced that it would be using the proceeds from this deal for stock buybacks.
Nestlé’s shares, on the other hand, saw a 1.8% jump in Zurich, which was a relief, since the company’s shares have already fallen more than 7% since the beginning of 2018.
Nestle had been looking at its Nespresso portioned-coffee product to be its major growth driver. However, cheaper knock off capsules that are compatible with its Nespresso machines – even Starbucks’ branded capsules – have eaten into the company’s profit margins and growth. Thank to this new deal, Nestle will now have control over Starbucks’ capsules – among its other product ranges, which will give the Swiss company a much needed boost. According to data from Euromonitor, Nestlé’s instant coffee business has lost market share for four of the last five years.
Starbucks is, according to the BrandZ Global 2017 report, the second most valuable fast food brand in the world, with an estimated worth of about $44 billion. Thus, according to Sanford C Bernstein analyst, Andrew Wood, for this deal, the Chief Executive Officer for Nestle, Mark Schneider, has agreed to pay 3.6 times for Starbucks. This is higher than other major global food acquisitions, which have averages at offers of 3 times the value of the companies they planned to buy, says Wood.
This is also going to be a big mergers & acquisitions test for Schneider himself, according to Wood. So far, in the last 10 to 15 years, his M&A track record has been less than fantastic. The company has been struggling to gain market share in the last decade since it launched the Nespresso brand, thanks to the dominance of Starbucks and Green Mountain. Green Mountain was bought over by Europe’s billionaire Reimann family’s JAB Holding Co.
JAB is Nestlé’s biggest competitor, and it has spent more than $30 billion building its coffee empire. JAB is now branching out to the soft drinks segments, having just closed an $18.7 billion deal to acquire Dr. Pepper Snapple Group Inc.
Therefore, this alliance between Nestle and Starbucks comes at a critical time for the Swiss company.