Partnership Will Unlock Growth for Starbucks
Its deal with Nestle will unlock the long-term value of the firm's international consumer packaged goods potential.
We see Starbucks' (SBUX) partnership with Nestle as a positive for the company and shareholders. As part of the agreement, Nestle will obtain the rights to market, sell, and distribute the Starbucks, Teavana, VIA, and other brands, with Starbucks also expanding its presence on Nestle's at-home single-serve platform (Starbucks' ready-to-drink beverage partnerships will not be impacted). In return, Starbucks will receive $7.15 billion--15 times the acquired assets' pro forma EBITDA--and will remain the licensor and supplier for the partnership while working closely with Nestle on innovation and go-to-market strategies. Starbucks will use the after-tax proceeds to expand its 2018-20 cash return target to $20 billion from $15 billion, coming from both share repurchases and dividends.
We've long thought that Starbucks' international CPG potential was underappreciated, and we believe this development can more rapidly unlock this long-term value and benefit the brand intangible asset behind our wide moat rating. Nestle has a wider distribution network across the globe--Nestle distributes in 191 markets versus 76 for Starbucks--and a meaningful single-serve business with its Nespresso and Dolce Gusto platforms, which will likely bolster our current mid- to high-single-digit growth assumptions for Starbucks' channel development business. We also believe this transaction allows the Starbucks brand to better compete with JAB's coffee portfolio of brands, including D.E Master Blenders, Panera, Peet's, and Keurig.
The transaction won't impact on our $68 fair value estimate. Management noted that it expects fiscal 2019 revenue will be hit by 2-3 points as it moves away from company to licensed revenue. It also expects EPS to be accretive within three years, though some transaction accounting treatment is still being finalized. Over a 10-year horizon, our outlook calling for average annual revenue growth of 9% and operating income growth in the low double digits remains intact.
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R.J. Hottovy does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.