May 7, 2018 / 11:48 AM / 7 months ago

Breakingviews - Nestlé gets welcome jolt from Starbucks deal

A customer sips on a coffee at a Starbucks coffeehouse in Austin, Texas, U.S., February 11, 2017. Picture taken February 11, 2017. REUTERS/Mohammad Khursheed

MILAN (Reuters Breakingviews) - Nestlé is getting a welcome jolt from Starbucks. On Monday, the Swiss food giant said it would pay $7.2 billion for the perpetual right to sell Starbucks-branded coffee pods, beans and so on. With $2 billion a year in annual sales, the business will help Nestlé in its shift away from junk food.

Nestlé is already a big name in coffee, thanks to brands like Nespresso and Nescafe. But Chief Executive Mark Schneider wants to do more. This deal helps it bulk up in the United States, where it is comparatively weak, and means it has more products to sell in fast growing Asia.

Nestlé also rounds out its product range, which at the moment centres on high-end Nespresso capsules and cheap instant drinks. It will now sell more packaged ground coffee and beans, for example. This will make a notable but not huge difference to the group’s top line, which analysts estimate will total nearly 92 billion Swiss francs this year.

Based on the limited available financials, the deal looks reasonable. Nestlé is paying 3.6 times the sales of the business it is acquiring: higher than Nestlé’s current enterprise value multiple of 2.9 times sales but bang in line with Starbucks, Thomson Reuters data show.

To complicate things, though, there are probably ongoing royalties too, which would effectively reduce the margins of the acquired businesses. Nestlé did not release any details on this, but it does pay such a fee for its long-standing deal with posh ice-cream brand Haagen-Dazs.

For Starbucks the logic is a bit less clear. Its Channel Development division, which includes some of the out-of-shop products it is selling to Nestlé, delivers chunky margins. And given the group’s huge store footprint, this was an interesting alternative way to pursue growth. Instead, spending the proceeds on buybacks and dividends shows a lack of ambition. Still, retiring $7 billion of stock could give the $80 billion company a bit of a boost.

Breakingviews

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