Coke Chugs Vitaminwater, Huge Share of Non-Carbonated Market

ATLANTA—Mere months after snagging nutrient-infused beverage maker Fuze Inc., the Coca-Cola Co. (NYSE:KO) agreed to purchase Energy Brands, aka Glacéau, the maker of the popular vitaminwater beverages, for $4.1 billion in cash. Coke executives said the acquisition is expected to close this summer and will be accretive to KO earnings per share in the first full year.

Glacéau will operate as a separate business unit within Coca-Cola North America (CCNA). According to Coke management, this structure will allow Glacéau to continue to grow in the marketplace by maximizing its focus, speed, sales and execution capabilities, while leveraging the scale of CCNA’s resources in supply chain, marketing and consumer insights, large customer management and foodservice. Glacéau’s top three executives—J. Darius Bikoff, Mike Repole and Mike Venut—will continue to lead the business for a minimum of three years; other key managers will also remain at Glacéau.

The deal provides Coke additional market share in the hot non-carbonated beverage category, which Coke has found difficult to crack with its own product development.

“Glacéau has built a great business with high-quality growth, as well as a strong pipeline of innovative products and brands,” said Neville Isdell, chairman and chief executive officer (CEO) of Coca-Cola Co. “We envision even faster growth for Glacéau as part of Coca-Cola’s enhanced range of brands for North American customers and consumers. We will manage this opportunity in a way that delivers attractive returns for our shareowners and also appropriately benefits our system.”

At the reported cash transaction price, the acquisition will follow in the footsteps of other recent purchases of non-carbonated beverage makers, going for multiples more than the acquired company’s 12-month trailing revenues; Glacéau 2006 annual revenues were estimated at around $350 million, but management said its biggest brand vitaminwater continues to grow between 80 and 100 percent, suggesting 2007 revenues will be at or near $700 million.

“I don’t think [Coke] overpaid,” Matthew Reilly, a Morningstar analyst, told Reuters. “Glacéau still has triple-digit growth. Everyone wants in the beverage industry, especially in North America, because growth is so tight.”

The acquisition is a win for many involved. India’s Tata Tea Inc., which bought a 30-percent stake in vitaminwater last year from TSG Consumer Partners for $677 million—called staggering by analysts at the time—more than doubles its investment as a result of the sale. There is no public information on how big a share Glacéau founder Bikoff held. On the other side, not only does Coke gain a sizeable share of a hot market, but Coca-Cola Enterprises, which bottles about 80 percent of Coke’s domestic volume, is expected to eventually gain the fruits of the vitaminwater business. To date, vitaminwater has mostly been handled by a network of independent distributors, which are credited with helping to grow vitaminwater and related brands. While these indies carry other similar beverage products, vitaminwater was often the key to opening doors for these distributors. This new challenge to their cash cow might just leave some independent vitaminwater distributors crying betrayal. When Tata bought its stake in Glacéau last year, Repole, chief financial officer (CFO), said: “The really good news for our employees, distributors and retailers who are responsible for our success is that this partnership ensures our continued independence.” Further, on one of its vitaminwater bottles, the company wrote: “although this is a great alternative to sports drinks, we do not believe in succumbing to commercialism. unless, of course there’s a lot of cash, then we’ll talk.” What appeared to have been a joke about cash was, in fact, no joke. But Glacéau management, which once saw Coke and Pepsi as targets, gushed at vitaminwater’s new corporate home.

“For a company like Coca-Cola to recognize the potential of Glacéau ... is a huge statement about their vision for the future of the beverage business,” Bikoff said during a conference call with reporters. “I can’t tell you how proud I am to be part of the Coke family and what a dream this is for me to fulfill.”

One vitaminwater distributor with a lot to lose is the Bottling Group, an independent enterprise from Cadbury Schweppes. This distribution system is part of the company’s America’s Beverage entity, which has been reportedly on the auction block. Its loss of vitaminwater to Coca-Cola Enterprises bottling unit is feared to levy a loss to Cadbury’s bottom line and negatively affect the bidding prices for the America’s Beverage sale.

On the other hand, the absence of vitaminwater from the independents’ trucks will free room for newer products to gain coveted distribution. Some speculate the opening could help grow another beverage product to similar heights at a time when companies are paying high multiples for products like SoBe, Fuze, vitaminwater and, possibly soon, Arizona Tea.

Companies blazing the stock market, such as Hansen Natural and Jones Soda, are well positioned for capital gains and possible acquisition.