Starbucks Corp must pay Kraft Foods $2.76 billion after it ended the companies' grocery deal at least three years early, the coffee chain said on Tuesday.
Mondelez International Inc spun off Kraft Foods, its North American grocery operations as an independent company in October 2012. Under an agreement between those two companies, Mondelez will receive all proceeds from the Starbucks-Kraft dispute.
An arbitrator ruled that Starbucks must pay $2.23 billion in damages plus $527 million for interest and legal fees, Starbucks said.
Based on the rules of binding arbitration, Starbucks cannot appeal.
The payment was larger than Wall Street expected, but roughly in line with the nearly $3 billion Kraft had sought, two analysts told Reuters.
Shares in Starbucks were down 1.2 percent at $79.41 in extended trading. Mondelez shares were up 3.3 percent at $33.51.
"We strongly disagree with the arbitrator's conclusion," Starbucks said in a statement.
Starbucks has adequate liquidity both in the form of cash on hand and available borrowing capacity to fund the payment, which will be booked as a charge to its fiscal 2013 operating expenses, the company said in a statement.
Kraft began selling bags of Starbucks coffee in grocery stores beginning in September 1998. Starbucks prematurely ended the contract in March 2011 and gave the business to privately held Acosta Inc.
Starbucks accused Kraft of multiple material breaches of contract, including mismanaging the brand. Kraft denied any breach and said that if Starbucks wanted out, it must pay Kraft fair value for the business, which brought in $500 million a year in revenue.
"We're pleased that the arbitrator validated our position that Starbucks breached our successful and long-standing contractual relationship without proper compensation," Gerd Pleuhs, general counsel for Mondelez said in a statement.
Starbucks will hold a conference call on Wednesday morning to discuss the ruling.
The deal's initial term was set to expire in March 2014. The agreement was to renew automatically for successive 10-year terms unless it is terminated sooner per the agreement.
(Additional reporting by Phil Wahba and Jonathan Stempel in New York; Editing by Bernard Orr and Bob Burgdorfer)