Coca Cola acquires Vitaminwater maker for $4.1 billion

Coca-Cola, the world’s largest beverage maker, on Friday said that it would acquire privately held Glaceau, the maker of Vitaminwater for $4.1 billion in cash. The acquisition, which is Coca Cola’s largest till date, is to be financed entirely out of debt.

Though it would reduce profits a bit this year after the acquisition in mid-June, the earnings would increase next year onwards. Coca Cola had $ 24.1 billion in sales last year. According to Morgan Stanley analyst Bill Pecoriello, 11 year old Glaceau also known as Energy brands Inc. made $ 350 million in sales last year. The New York based company will only add to Coca Cola’s hold over the market for water drinks which currently accounts for 5 percent of the U.S market while PepsiCo has 45 percent.

“There are simply no other privately owned brands out there which could give Coke the kind of potential Glaceau does” said John Sicher, an industry analyst and editor of Beverage Digest. “In addition, Coke can create more value by putting it into its strong international bottlers. That will further help make this deal pay off.”

Formed in 1996 by J. Darius Bikoff, Glaceau is famous for Vitaminwater whose grape-flavoured formula 50 is endorsed by rapper 50 cent, Fruitwater, Smartwater and Vitaminenergy. The brand is also endorsed by singer Kelly Clarkson, San Antonio spurs player Tony Parker and hockey player Daniel Briere of the Buffalo Sabers.

At present 30 percent of the stake in Glaceau is held by the Tata group, an India based firm which is also involved in steel manufacture, software services, hotels, car manufacture and insurance. Coca Cola will take full ownership said Gary Fayard, Coca Cola’s chief financial officer.

Officials said that Tata will get $ 1.2 billion of the $4.1 billion price offer. The Coca Cola offer is 81 percent higher than what Glaceau was estimated to be nine months ago when Tata bought its stake. Analysts call the purchase price rather ‘lofty’ since the beverage industry hasn’t been bringing the long-term growth that is hoped for. In the U.S soft drink volume declined by 1.2 percent for Coca Cola and 1.3 percent for PepsiCo last year.

Shares of Coca Cola have been rising by 17 percent in the last one year as compared to 14 percent for Pepsi. However, with the acquisition Coca Cola would lose some of its flexibility in buying back its own shares. The Atlanta based company had said that it would buy $2.5 billion to $3 billion of its stock this year, but it is now expected that Coca Cola would buy back $1.75 billion to $2 billion in shares this year.

“They see value in us I don't even think we completely recognize”, said Bikoff, who founded the company and is also Chief Executive officer of the company. “We built a brand that people love because it works so well in the context of their lives.”