Nestle Latching On to Starbucks Keeps JAB at Bay, Analysts Say

(Bloomberg) -- Nestle SA's $7.2 billion latch-on to Starbucks Corp.'s empire is a positive move for the Swiss maker of Nescafe, which needs to defend itself from increasing competition in the coffee market and bolster U.S. sales of the brown beverage, analysts said.

Nestle plans to use the Starbucks brand in its Nespresso and Dolce Gusto capsule systems, starting next year, after inking rights to sell Starbucks coffee products in supermarkets, restaurants and catering operations. Its shares were up 0.7 percent as of 11 a.m. in Zurich.

Nestle is “fighting back with the right weapons,” MainFirst Bank AG analyst Alain Oberhuber wrote in a note to clients. “Especially in the U.S., packaged coffee and ready-to-drink coffee beverages face new and large entrants.” The deal helps it keep competitor JAB Holdings at bay, according to Vontobel.

Here's what else Nestle analysts think of the deal:

Bernstein, Andrew Wood

(Market-perform, PT CHF81)

There are “several” positives for Nestle, including a “clear strategic alignment,” given the acquisition is in one of the company's core, high-growth, high-margin categories”; transaction enhances Nestle's global number 1 position in coffee. The price paid is “fairly reasonable.” Among the concerns is Nestle's acquisition track record, which over the past 10 to 15 years was “less than stellar,” both in terms of purchase price and post-deal integration. This is Mark Schneider's “first big M&A test” as new chief executive officer of Nestle.

Bryan Garnier, Virginie Roumage

(Neutral, Fair Value CHF85)

Coffee is a priority category for the Swiss company, alongside petcare, infant nutrition and water. Deal with Starbucks will help accelerate growth in the out-of-home channel by combining Nestle's soluble business with Starbucks products. It's likely Nestle will record a low single-digit positive impact on estimated 2019 earnings per share.

Kepler Cheuvreux, Jon Cox

(Buy, PT CHF90)

Deal strengthens Nestle's coffee business in roast and ground and is part of the company's strategy to make investments in its key coffee category. Nestle is underrepresented in coffee in North America. Expect the Swiss company to use its sales platform to accelerate sales of Starbucks products elsewhere in the world: “Starbucks is a popular brand, appealing to millennials.” Assumes the transaction will add 2% to estimated 2019 earnings per share.

Vontobel, Jean-Philippe Bertschy

(Buy, PT CHF90)

As was the case with its purchase of Canadian dietary supplements maker Atrium Innovation, Nestle once again surprises the market with an “unexpected” transaction. Starbucks deal allows it to keep JAB Holding Co. at bay. It also will help Nestle gain scale in the U.S., “a weak spot so far.” The price might appear expensive but, given the returns, the deal could exceed the cost of capital in three to four years.

Zuercher Kantonalbank, Patrik Schwendimann

(Underperform)

Transaction looks “strategically key,” and means a third strong global coffee brand for Nestle, after Nescafe and Nespresso. Deal offers Nestle growth opportunities in the North American coffee market and in the rest of the world too.

--With assistance from Heather Burke Blaise Robinson and David Verbeek

To contact the reporter on this story: Albertina Torsoli in Geneva at atorsoli@bloomberg.net.

To contact the editors responsible for this story: Celeste Perri at cperri@bloomberg.net, Angela Cullen

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