On May 7, Nestlé (NSRGY) and Starbucks (SBUX) announced that Nestlé has agreed to pay Starbucks $7.2 billion for exclusive rights to sell its packaged coffees and teas through its global distribution channels.
Nestlé, which has a strong presence in the coffee business through well-known brands such as Nescafe and Nespresso, will now add Starbucks coffee and tea products. The deal covers only Starbucks’s bagged coffee, drinks, and Nespresso-style pods. It doesn’t include Starbucks’s ready-to-drink products.
Under the new deal, 500 Starbucks employees will move to Nestlé, but no industrial assets will be transferred. Also, Nestlé will be working with Starbucks to produce new products and Starbucks capsules for its coffee machines. The deal could also help Starbucks sell its products in underserved markets through Nestlé’s strong distribution channel. Starbucks has stated that it will utilize the proceeds from the deal to accelerate its share repurchase program and return $20 billion to shareholders by the end of fiscal 2020, up from the previously announced $15 billion.
The deal did not have much impact on Starbucks stock, which was trading 0.4% down at the close of May 7. However, Nestlé stock rose.
Year-to-date stock performance
In 2017, Starbucks returned 3.4%. However, since the beginning of 2018, Starbucks stock has been flat. The company’s stock price was negatively impacted by its fiscal 2Q18 earnings, which it announced on April 26. You can read a detailed analysis of Starbucks’s fiscal 2Q18 earnings in Why Starbucks’s Fiscal 2Q18 Earnings Failed to Impress. In comparison, the S&P 500 Index was also flat year-to-date due to the weakness in the broader equity market.