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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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