Nestle's (NSRGY) acquisition of Starbucks' consumer product range, which includes the portfolio of soluble, roast and ground, and capsule coffee, as well as Teavana tea, is strategically a net positive in our view, but neutral to our valuation. We intend to update our model after the analyst call but do not expect to change our CHF 79 fair value estimate or our wide moat rating. We think Nestle's market value offers limited upside to its intrinsic value, particularly after the recent pullback across the consumer staples sector.
Nestle has been underperforming both its own historical performance and many of its multinational consumer stales peers, and we think investors want to see an improvement on the roughly 2% organic growth the company reported in the last couple of quarters. Expanding in premium coffee seems to be a reasonable way to achieve that, as we think innovation opportunities are more plentiful in the premium segment, which could drive stronger price/mix, something that Nestle has clearly been lacking in recent quarters.
By our estimates, the assets that Nestle is acquiring for $7.15 billion generate sales of around $2 billion and an EBITDA margin of roughly 24%, slightly below that of Nestle's existing coffee business. Opportunities for cost synergies, however, appear limited because the agreement appears to be around marketing and innovation strategies only, and does not involve the transfer of fixed assets. We are somewhat concerned that shelf space gains will come at the cost of some cannibalisation of Nespresso and Nestle Dolce Gusto, but we anticipate that stronger price/mix will drive faster growth in premium versus mainstream price segments.
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Philip Gorham does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.