LONDON/ZURICH, May 7 (Reuters) - Swiss-based food giant Nestle will pay Starbucks $7.15 billion in cash for the rights to sell the U.S. coffee chain's products around the world, tying a premium brand to Nestle's global distribution muscle.
The deal on Monday for a business with $2 billion in sales reinforces Nestle's position as the world's biggest coffee company tries to fortify its place atop a fast-changing market.
It is a bold stroke by new Nestle Chief Executive Mark Schneider, who has made coffee a strategic priority as he tries to convince uneasy shareholders, including activist Third Point, that he can boost the sprawling group's performance.
Bernstein analyst Andrew Wood said that Nestle's third-biggest acquisition would allow the Swiss company to expand the brand through its global distribution network.
Bars of KitKat chocolate, produced by Nestle SA, sit on display at Nestle's headquarters in Vevey, Switzerland, on Thursday, Feb. 19, 2015. Nestle, the world's biggest food company, forecast 2015 sales growth near the low end of its long-term target after reporting the slowest annual sales growth in five years, hit by stagnant revenue in China. Photographer: Gianluca Colla/Bloomberg via Getty Images
Bars of Nestle brand chocolate sit on display at the Nestle SA headquarters in Vevey, Switzerland, on Thursday, Feb. 19, 2015. Nestle, the world's biggest food company, forecast 2015 sales growth near the low end of its long-term target after reporting the slowest annual sales growth in five years, hit by stagnant revenue in China. Photographer: Gianluca Colla/Bloomberg via Getty Images
SAN FRANCISCO, CA - FEBRUARY 18: Nestle Crunch candy bars are displayed on a shelf at a convenience store on February 18, 2015 in San Francisco, California. Nestle USA announced plans to remove all artificial flavors and FDA-certified colors from its entire line of chocolate candy products, including the popular Butterfinger and Baby Ruth candy bars, by the end of 2015. (Photo by Justin Sullivan/Getty Images)
SAN FRANCISCO, CA - FEBRUARY 18: Nestle Butterfinger candy bars are displayed on a shelf at a convenience store on February 18, 2015 in San Francisco, California. Nestle USA announced plans to remove all artificial flavors and FDA-certified colors from its entire line of chocolate candy products, including the popular Butterfinger and Baby Ruth candy bars, by the end of 2015. (Photo by Justin Sullivan/Getty Images)
Sealed packets of Nesquik countlines confectionary pass through a processing machine during production at the Rossiya chocolate factory, operated by Nestle SA, in Samara, Russia, on Tuesday, Sept. 16, 2014. In Aug. Nestle cited Russia as a key driver of 1H sales growth in eastern Europe, especially in ice cream and confectionery. Photographer: Andrey Rudakov/Bloomberg via Getty Images
Bars of Russian and Nestle SA-branded chocolate, center, sit on a shelf inside an OAO Magnit hypermarket in Krasnodar, Russia, on Thursday, Aug. 7, 2014. Russia slapped import bans on an array of food goods from the U.S. and Europe and threatened to target the automotive, shipping and aerospace industries, striking back at sanctions over the conflict in Ukraine. Photographer: Andrey Rudakov/Bloomberg via Getty Images
Multipacks of Toffee Crisp chocolate bars, produced by Nestle SA, sit displayed for sale inside a supermarket in London, U.K., on Tuesday, Feb. 11, 2014. The pound rose to a one-week high against the dollar after an industry report showed U.K. retail sales growth accelerated in January, adding to evidence the recovery is gaining momentum. Photographer: Simon Dawson/Bloomberg via Getty Images
KitKat chocolate confectionary bars, manufactured by Nestle SA, sit displayed for sale in a newsagent's store in London, U.K., on Thursday, Oct. 17, 2013. The cost of chocolate is set to rise, propelled by raw sugar trading at a nine-month high and this year's 60 percent increase in cocoa butter combined with the arrival of Christmas demand. Photographer: Chris Ratcliffe/Bloomberg via Getty Images
Bars of chocolate Crunch move on a conveyor belt at the Nestle SA chocolate production plant in Toluca, Mexico, on Wednesday, Oct., 9, 2013. Nestle SA, the worlds biggest food company, manufactures and markets a wide range of food products including milk, chocolate, confectionery, bottled water, coffee, creamer, food seasoning and pet foods. Photographer: Susana Gonzalez/Bloomberg via Getty Images
Chocolate with the brand of 'Galak' are seen in a display at the Switzerland's oldest chocolate factory of Cailler, owned by giant food company Nestle on March 29, 2010 in Broc. AFP PHOTO / FABRICE COFFRINI (Photo credit should read FABRICE COFFRINI/AFP/Getty Images)
Smarties chocolates, one of many Nestle products. (Photo by: Newscast/UIG via Getty Images)
(GERMANY OUT) white chocolate from the Nestle company (Photo by SchÃ¶ning/ullstein bild via Getty Images)
SWITZERLAND - FEBRUARY 19: A pile of Nestle chocolate bars seen at the Nestle factory in Broc, Switzerland , Thursday, February 19, 2004. Nestle SA, the world's largest foodmaker, said first-half profit rose 2.1 percent after the company sold more Nespresso coffee and Purina Dog Chow, cut manufacturing costs and shed less-profitable businesses. (Photo by Christophe Bosset/Bloomberg via Getty Images)
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Nestle shares rose 1.4 percent by mid-session, having fallen by more than 8 percent so far this year. Starbucks stock was indicated 2.8 percent higher.
Seattle-based Starbucks, the world's biggest coffee chain, said it will use proceeds to speed share buybacks and the deal would add to earnings per share (EPS) by 2021 at the latest.
Nestle said it expects the deal to sell Starbucks bagged coffee and drinks adding to earnings by 2019. It will not involve any of Starbucks' cafes or ready-to-drink products.
But it does let Nestle sell Starbucks coffee in individual pods -- as it does now with Nespresso and Nescafe -- and expand sales of Starbucks soluble coffee, a key market in Asia. Starbucks now sells single-serve coffee in Kuerig K-cup pods.
The Nestle name will not appear on Starbucks products. "We do not want the consumer to perceive that Starbucks is now part of a bigger family," a Nestle source said.
Starbucks, strong mostly in the United States, will have the final say on expanding its product range.
"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 Starbucks Chief Executive Kevin Johnson.
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CHENGDU, SICHUAN PROVINCE, CHINA - 2015/09/13: Coffee cup on table in a Starbucks cafe. Starbucks is streamlining the ordering process so customers are able to get that cup of coffee faster than usual. (Photo by Zhang Peng/LightRocket via Getty Images)
A cappuccino coffee sits in a Starbucks Corp. Reserve cup, used for specialist coffee, on the counter at a Starbucks coffee shop in London, U.K., on Friday, Oct. 16, 2015. Coffee futures fell the most in seven months after Colombia announced measures that will increase exports, spurred by the plight of farmers in the country who are dealing with drought conditions linked to the El Nino weather pattern. Photographer: Chris Ratcliffe/Bloomberg via Getty Images
BEIJING, CHINA - 2014/12/24: A paper coffee cup and Starbucks logo. Starbucks will continue its expansion in China in 2015 and double its China store count to 3,000 by 2019. In its first-quarter fiscal report, the coffee giant shows optimistic expectation for its robust expansion plans in 2015. (Photo by Zhang Peng/LightRocket via Getty Images)
A Starbucks employee writes a message on a cup of freshly brewed coffee at a local store in Washington, DC on December 26, 2012. Starbucks stirred the political pot Wednesday by urging its baristas to write 'come together' on its cups as a way to pressure US lawmakers to compromise on a deal to avert a year-end fiscal crisis. Starbucks chief executive Howard Schultz said the American coffee giant was recommending its first-ever message on the side of tall, grande and venti (small, medium and large) drinks sold at its Washington stores as a way to help break the capital's gridlock on the so-called 'fiscal cliff.' Lawmakers and the White House have less than a week to work out a deal aimed at preventing tax hikes from hitting all Americans and a series of deep, mandated spending cuts from kicking in beginning January 1. AFP PHOTO/Eva HAMBACH (Photo credit should read EVA HAMBACH/AFP/Getty Images)
A Starbucks coffee cup is seen in this photo taken August 12, 2009. AFP Photo/Paul J. Richards (Photo credit should read PAUL J. RICHARDS/AFP/Getty Images)
MIAMI - JANUARY 18: In this photo illustration, the new Starbucks 31-ounce Trenta size ice coffee is seen on the right next to a tall cup of Starbucks coffee on January 18, 2011 in Miami, Florida. Starbucks rolled out the newest member of its lineup of drinks which is available only for Tazo shaken iced teas, iced tea lemonades and iced coffees. (Photo illustration by Joe Raedle/Getty Images)
TOKYO, JAPAN - SEPTEMEBR 26: Starbucks Coffe Company's news product 'Starbucks Discoveries'(Espressso (L), Latte (R)) are seen during a preview party on September 26, 2005 in Tokyo, Japan. 'Starbucks Discoveries' is the company's first chilled cup coffee product which will be available at convenience stores on September 27 in Japan with the same coffee beans used at Starbucks stores. (Photo by Junko Kimura/Getty Images)
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Nestle and Starbucks are joining forces in a highly fragmented consumer drinks category that has seen a string of deals lately.
JAB Holdings, the private investment firm of Europe's billionaire Reimann family, has fueled the consolidation wave with a series of deals including Douwe Egberts, Peet's Coffee & Tea and Keurig Green Mountain, narrowing the gap with Nestle.
Coffee is popular with younger customers who have grown up with Starbucks. A willingness to pay up for exotic beans and specialty drinks means companies can brew up richer profit margins than in mainstream packaged food.
Starbucks said it now expects to return approximately $20 billion in cash to shareholders in share buybacks and dividends through fiscal year 2020.
It said the transaction was expected to add to earnings per share by the end of fiscal year 2021 or sooner, with no change to the company's currently stated long-term financial targets.
Nestle said it expected the business to contribute positively to earnings per share and organic growth targets from 2019.
The company source said it would also pay market-linked royalties to Starbucks. It will not buy any industrial assets as part of the deal, but could step in to produce in markets where Starbucks is not present.
Nestle, which will take on about 500 Starbucks employees, said its ongoing share buyback program remained unchanged.
The agreement will strengthen Nestle's position in the United States, where it is the No. 5 player with less than 5 percent of the market. Market leader Starbucks has a 14 percent share, according to Euromonitor International.
"In the U.S., Nescafe is seen as a downscale brand for older people, and the Nespresso system as a niche product. Starbucks is the quality, mass-market leader," said Erik Gordon at the Univesity of Michigan's Ross School of Business.
"Nestle is far and away the largest hot drinks company globally, with more in sales than the next five largest hot drinks companies combined," Matthew Barry, an analyst at Euromonitor, said when the tie-up was first mooted on Friday.
"However, Nestle's leadership position is less secure than it once was."
COFFEE IN FOCUS
Other big players are growing as well, including Italy's Lavazza, which is now the world's No. 3.
Nestle CEO Schneider last year identified coffee as an area of investment.
It bought Texas-based Chameleon Cold-Brew in November and took a majority stake in Blue Bottle Coffee, a small upscale cafe chain, in September.
Starbucks, which in April reported a global drop in quarterly traffic to its established cafes, has been revamping its business amid competition in its key home market. It sold its Tazo tea brand to Unilever for $384 million and closed underperforming Teavana retail stores.
Starbucks is rapidly expanding in China, which it expects to one day be its largest market. It also plans to open 1,000 upscale Starbucks Reserve stores and a handful of Roastery coffee emporiums to take on high-end coffee rivals such as Intelligentsia Coffee & Tea and Blue Bottle.
Starbucks has long farmed out the retail distribution of its packaged products to a company more specialized in that process, but the partnerships have not always been smooth.
Nestle, the world's largest packaged food company, is also not shy when it comes to partnering with rivals through licensing deals or joint ventures, having reached arrangements with General Mills' and Hershey, among others.
(Additional reporting by John Miller; Editing by Louise Heavens)