Coca-Cola acquires 40 pct stake in Honest Tea

CHICAGO (Reuters) - Coca-Cola Co (KO.N) said on Tuesday it reached an agreement to acquire a 40 percent stake in organic tea maker Honest Tea Inc, the latest step by the world's largest beverage company to expand in faster-growing noncarbonated drinks.

Financial terms of the investment in Honest, which makes bottled ready-to-drink beverages, were not disclosed. The soft drink maker said it may elect to buy the outstanding interest sometime in the future.

"Honest is a small brand, but a good brand," John Sicher, editor of industry newsletter Beverage Digest, said. "It's not initially going to add much volume for Coke, but it shows that Coke is focused and aggressive about beefing up its ready-to-drink tea business."

For some time, Coca-Cola had lagged behind rival PepsiCo Inc (PEP.N) when it came to expanding its noncarbonated beverage business, even as that sector grew while carbonated beverages were fizzling.

Sicher said that carbonated beverage sales may have been down 1 percent to 2 percent industrywide in 2007, though final data is not yet in.

But Coca-Cola has since added more noncarbonated beverage lines with acquisitions like those of vitamin-water maker Glaceau and juice and tea maker Fuze Beverages LLC last year.

Other acquisitions could be on the horizon as Coca-Cola continues to look to expand its tea business, UBS analyst Kaumil Gajrawala said in a research note.

"While we view this deal favorably, we believe Coca-Cola will continue to look at adding an established tea brand, such as Snapple or Arizona as mentioned in prior press reports," he said.

Snapple is currently owned by Cadbury Schweppes (CBRY.L), while AriZona Beverage Co, maker of AriZona Iced Tea is privately held.

Coca-Cola shares were down $1.12 at $57.51 at midday Tuesday on the New York Stock Exchange.

(Additional Reporting by Justin Grant, editing by Gerald E. McCormick and Gunna Dickson)