Starbucks Corp. is giving Nestle SA a shot at revitalizing its global coffee business. In the third-biggest transaction in Nestle’s 152-year history, the Swiss food giant will spend $7.15 billion for the right to market Starbucks-branded products from beans to capsules, marrying its international distribution network with the allure of arguably the biggest name in java.
Nestle won’t get any physical assets in the deal. Instead, Chief Executive Officer Mark Schneider is harnessing the name recognition of Starbucks, with its 28,000 outlets around the globe and massive draw in the U.S. Nestle has struggled there for years with its own products like Nespresso and Dolce Gusto.
Nestle could use a jolt — sales rose at their weakest pace in more than two decades last year.
“This will be his first big M&A test,” wrote Andrew Wood, an analyst at Sanford C. Bernstein. “Nestle’s acquisition track record over the last 10-15 years has been less than stellar.”
Knockoff capsules — including Starbucks-branded ones — have dented one of Nestle’s largest growth engines, its Nespresso portioned-coffee business. The new deal will give the Swiss company control of Starbucks capsules, among other products. It comes as Nestle’s Nescafe brand of instant coffees has lost market share in four of the past five years, according to Euromonitor.
Starbucks is the second-most-valuable brand in fast food, according to BrandZ’s Global 2017 report, which estimates it’s worth $44 billion. Nestle’s $7.15 billion payment is 3.6 times sales, higher than the average of 3 times for major global food deals, according to Bernstein’s Wood.
Nestle shares rose 1.1 percent as of 12:07 p.m. in Zurich. They’ve dropped about 9 percent this year.
Nestle is making a new offensive in the U.S. a decade after Nespresso renewed a push into that market, enjoying limited success as most coffee drinkers avoid small espressos. Nestle has been struggling to gain market share in that market, given the prevalence of Starbucks and Green Mountain, which was bought out by Europe’s billionaire Reimann family. Their JAB Holding Co. has spent more than $30 billion building a coffee empire by acquiring assets such as Peet’s and combining with Mondelez International Inc.’s coffee business.
“JAB is the biggest danger for Nestle,” said Alain Oberhuber, an analyst at MainFirst Bank in Zurich. “Nestle needed a big brand, and they needed one fast. Starbucks is the only strong brand in roast-and-ground. It’s a rather defensive move — a bit late — but nevertheless, a strategically absolutely vital step.”