NEW YORK Coca-Cola Co. (KO.N) said on Friday it would buy vitaminwater maker Glaceau for $4.1 billion cash, boosting its lagging position in the race to dominate the fast-growing market for noncarbonated drinks.
The world's largest beverage company hopes the vitaminwater brand of sweet, colorful water drinks with added vitamins will help offset falling U.S. soft drink sales as consumers opt for energy drinks and sports drinks they perceive as healthier.
"Coke lags Pepsi in the noncarbonated area, and it now has a brand which can get it back in the game in a significant way," said John Sicher, editor and publisher of Beverage Digest.
India's Tata Tea Ltd. TTTE.BO, which last year bought a 30 percent stake in Glaceau for $677 million, said on Friday it would receive about $1.2 billion, nearly doubling its investment. Tata's purchase, announced in August, valued Glaceau at about $2 billion.
Glaceau founder and Chief Executive J. Darius Bikoff declined to reveal his personal stake in the company, except to say it is 70 percent privately owned.
"We see the deal as a question mark for Coke," said J.P. Morgan analyst John Faucher in a research note. "We think Coke will need to prove it is beneficial to shareholders to spend $4 billion for the latest "hot" beverage brand."
A source familiar with Queens, New York-based Glaceau said it had 2006 revenue of $355 million and forecast it would reach $700 million this year.
That would value the deal at 9 to 10 times the company's trailing 12-month revenue, a huge premium to the median multiple of 1.2 times for public nonalcoholic drink companies, according to Paul Altman, principal of the Sage Group, an investment bank that specializes in consumer products.
Altman said PepsiCo Inc.'s (PEP.N) recent acquisition of IZZE Beverage Co. was at 3.8 times revenue, while deals in the health and wellness categories over the last year have seen a median value of 2.5 times trailing 12-month revenues.
Coke, which also lowered its 2007 target for share buybacks, expects the deal to reduce earnings slightly in 2007, but add to earnings slightly in 2008. Coke shares were up 65 cents, or 1.3 percent at $51.89 on the New York Stock Exchange.
"I don't think (Coke) overpaid," said Morningstar analyst Matthew Reilly. "Glaceau still has triple-digit growth. Everyone wants it in the beverage industry, especially in North America because growth is so tight."
Glaceau products, which include vitaminwater, smartwater, fruitwater and vitaminenergy drinks, are sold mostly in North America, with a concentration in the Northeast.
Coke said it would expand into other countries, starting with its key developed markets in Western Europe and Latin America.
Coke, based in Atlanta, did not specify what plans it has to distribute vitaminwater, saying it wants to evaluate its route to market, a smart move according to Reilly.
"It looks like they've learned a little from past mistakes, even that others have made," Reilly said, adding that Quaker Oats "forced" Snapple into distribution channels that did not necessarily fit and "ruined it."
Coke expects to close on the purchase of the majority stake in mid-June and on Tata's stake around November 1.
Reilly also said the deal would "bolster (Coke's) tarnished public image as a purveyor of unhealthy offerings.
Glaceau, known for its stylish label and irreverent marketing message, sold 77 million cases last year, compared with 95 million cases for Pepsi's Propel Fitness Water, according to data from Beverage Digest.
Glaceau will operate as a separate business unit within Coca-Cola North America and its top three executives -- Darius Bikoff, Mike Repole and Mike Venuti -- plan to continue running the company for a minimum of three years, the companies said.
(Additional reporting by Franklin Paul)