Recently, Starbucks sold the rights to their brand to Nescafé, who paid 7.2 billion to sell coffee in grocery stores. They had previously sold the rights to Tazo tea for 350 million. Starbucks sells 1.8 billion a year of branded coffee beans, which is 8% of their business.
I was hoping some savvy businessperson could correct and learn me. To me, this seems a ludicrously high amount to pay. Nestle already has Nescafé, Nespresso and other brands. Are they really going to sell so much more coffee to cover the cost of goodwill? If the amount they paid was inflated, how do impairments work and how is the fair value of this gamble determined in the future? Are there other tax advantages that make this a better deal than it seems?
According to Fortune Magazine:
'The alliance underlines Nestle’s efforts to capture more upscale java drinkers in the U.S., 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.
“The deal with Starbucks allows Nestle to keep JAB at a distance,” Jean-Philippe Bertschy, an analyst at Bank Vontobel AG, wrote in a note. He added that the price may seem expensive, but the investment may pay off within three to four years. “It allows Nestle to gain scale in the U.S., a weak spot so far.”’
So IOW, Nestle believes this deal will give them an advantage over their largest global competitor and will pay off in 3-4 years.
But I haven’t done any sort of valuation to see if the numbers support that theory.
Not to be snarky, but I doubt any of us random folks are likely to know more about the deal than the Nestle executives who signed up to it. I agree it looks like a gamble, but most business deals are. It’s a bit like stock market trades - it’s unusual for a trade to be good for both sides, one will usually be happier than the other with the final outcome. If they have to write off part or all of their investment in the future, the tax advantages (if any - I’m no expert) wouldn’t outweigh the overall loss, but it may have been a factor in their calculations.
Bloomberg’s analysis at least also concludes the deal makes sense for Nestle, even if the valuation is somewhat higher than the industry has had for other similar deals.
So the calculus - Nestle is trying to move away from its reliance on sweets as that business is contracting. They’ve sputtered in coffee and this can give them the shot they need. They also have the resources and infrastructure internationally, especially in Asia, to possibly deliver on the overseas growth that the brand has not yet delivered.
A multiple over revenue of 3.6 compared to the 3.11 that J.A.B. paid for Keurig Green Mountain in 2015 when that is really the fastest way to become a competitor in that market (and Nescafe is not one right now) and one sees the opportunity to increase growth significantly overseas with Nestle’s strengths, does not seem too crazy. Will it turn out to be a good choice? Dunno. But the stock had been declining most of the year.
Nescafé is instant coffee. Have you ever had instant coffee? It is not good. It looks like Nestlé want to move into the brewed coffee business. They already have the Nespresso brand for espresso and pod coffee machines, but that’s still tainted with the association with Nescafé instant coffee. Being able to market under the Starbucks brand frees them from unpleasant associations by the consumer.
It does seem a little odd to me that the brand identity of the coffee shops and the store product is still inexorably tied together, but now with two different owners who may have different objectives for the brand over time.