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Coca-Cola Agrees to Buy Vitaminwater
By ANDREW ROSS SORKIN and ANDREW MARTIN
New York Times
May 26, 2007
The Coca-Cola Company announced today that it will buy Glaceau, the
maker of Vitaminwater, for $4.2 billion in cash.
The acquisition has been expected for weeks, as Coke pursued Glaceau,
which is also known as Energy Brands, to upgrade its portfolio of
noncarbonated beverages, the sales of which have been growing much
faster than soda in the United States in recent years.
In a statement, E. Neville Isdell, the chief executive of Coke, said:
“Glaceau has built a great business with high-quality growth, as well
as a strong pipeline of innovative products and brands. We envision
even faster growth for Glaceau as part of Coca-Cola’s enhanced range
of brands for North American customers and consumers.”
While the price tag is substantial for a company with earnings in
2006 of about $350 million, analysts said the cost in avoiding the
deal, given Coke’s relatively weak position in noncarbonated beverages,
could also be high.
It may also exorcise some ghosts in Coke’s past. For the last decade
or so, Coke, which has 43 percent of the soda market in the United
States, compared with 31 percent for the rival PepsiCo, has lagged
behind in introducing noncarbonated beverages.
It was late in introducing bottled water to the market. And in 2000,
Coke’s chief executive signed a deal to buy Quaker Oats that included
Gatorade, but the board turned him down. Quaker was then swept up
by PepsiCo.
This year, PepsiCo’s share of the noncarbonated beverage industry
in the United States — which includes bottled water, sports drinks
and juice — was 50 percent. Coke’s market share was 23 percent, according
to the trade publication Beverage Digest, which first reported the
negotiations last month.
William Pecoriello, an analyst with Morgan Stanley, called the acquisition,
a “potential game changer” in the market for noncarbonated drinks.
“It would fill a major gap in it’s noncarb portfolio,” Mr. Pecoriello
said last week in a note to investors.
Glaceau also makes Fruitwater, an energy drink called Vitaminenergy
and Smartwater, which contains electrolytes. Mr. Pecoriello said the
sale of Glaceau’s products could be expanded overseas. The jewel of
Glaceau is Vitaminwater which is vitamin-fortified and offered in
flavors. It is among a fast-growing category known as functional foods,
which market themselves as offering an additional benefit beyond basic
nutrition. Energy drinks fortified with ginseng, orange juice with
added calcium and yogurt with live bacteria called probiotics are
examples of fortified foods.
Each bottle promises a specific benefit. Kiwi-Strawberry flavored
Vitaminwater, for example, promises “focus” and “healthy support for
eyes and skin” with Vitamin A and lutein, described as a natural antioxidant
that protects against eye disease. There is also a Vitaminwater with
green tea extract, which promises to “rescue” because of its purported
cancer-fighting properties.
Glaceau’s Web site says, “Welcome to the Center for Responsible Hydration.”
The company was founded in 1996 by J. Darius Bikoff, who remains chief
executive. He could not be located for comment.
Glaceau is based in Whitestone, Queens. Last year, an Indian tea company,
Tata Tea, bought a 30 percent in Energy Brands for $677 million. At
that time, a Tata executive told Dow Jones that Glaceau’s revenue
for the year would be $355 million and would jump to $700 million
in 2007.
The company sold 77 million 192-ounce cases last year, a standard
industry measure, according to Beverage Digest, a 103 percent increase
over the previous year.
By contrast, Coca-Cola sold 5.5 billion cases in the United States
alone.
When he took over as chief executive in 2004, Mr. Isdell, a longtime
Coke executive who had retired to Barbados, said his turnaround effort
would focus on ironing out turmoil within the company, improving morale
and focusing on rebuilding its core soda brands.
He also vowed to improve the company’s innovation pipeline. But once
the company was stabilized, Mr. Isdell said he would be prepared to
make more transformational acquisitions.
“It’s the right play,” said Tom Pirko, president of Bevmark, a consulting
firm to the food and beverage industry, including Coke. “When you
look at what’s happening with Coke, they can’t innovate their way
out. They have to buy their way out.”
In America, soft drinks account for 67 percent of the nonalcoholic
beverage business, with bottled water making up 17 percent and other
noncarbonated beverages, 16 percent, Beverage Digest said. But in
2006, soft drink volumes declined slightly while bottled water was
up 17 percent and other non-carbonated drinks increased 13 percent.
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