Food giant Nestle, based in Switzerland, will pay $7.15 billion to coffeehouse chain Starbucks for the rights to sell the U.S.-based company’s products across the globe in a worldwide alliance that has a goal of reviving their coffee empires.
This deal announced on Monday for a business that has sales of $2 billion reinforces the position of Nestle as the world’s largest coffee company attempts to fortify its place at the top of a market that is rapidly changing.
Starbucks, based in Seattle, said it would use the proceeds from the deal to increase the pace of share buybacks, while the deal would add to its per share earnings in 2021 or sooner.
Nestle is expecting this deal to sell drinks and bagged coffee from Starbucks to add to its earnings during 2019. The deal does not involve any of the cafes in Starbucks’ chain.
Nestle joins Starbucks in a consumer drinks category that is highly fragmented and has seen several deals of late.
JAB Holdings, which is a private investment firm owned by the billionaire Reimann family in Europe, has driven a wave of consolidations with several deals that included Peet’s Coffee & Tea, Keurig Green Mountain and Douwe Egberts, that has helped to narrow the gap between them and Nestle.
CEO at Starbucks Kevin Johnson said through a prepared statement that the global alliance with Nestle will bring Starbucks to the home of millions around the globe through the reputation and reach of Nestle.
Starbucks said that it is now expecting to return as much as $20 billion to shareholders in share buybacks as well as dividends through its 2020 fiscal year.
It added that the transaction is expected to add to its earnings per share before the end of its 2021 fiscal year, with no changes to the currently stated financial targets for the long-term.
In its own statement, Nestle said that it expected the new business to contribute to earnings per share as well as its targets for organic growth starting in 2019.
A source with the company said it would be paying royalties that are market-linked to Starbucks after its initial fee and is not buying industrial assets in this deal.
Nestle will be taking on approximately 500 employees from Starbucks in the deal and said its own current program for share buyback would not be changed.
This agreement strengthens the position of Nestle in the U.S. where it currently holds less than 5% of the overall market as the No. 5 coffee player.