What Coke's and Green Mountain's Partnership Means for SodaStream
Not gonna lie, this hurts at first glance as a SodaStream (SODA) shareholder. Okay, it actually hurts a little on the second and third glances also. Green Mountain Coffee Roasters (GMCR) is up 40% in after hour trading. SodaStream is down 6%. More of my thoughts below; first, here are some highlights from the press release announcing the partnership:
The Coca-Cola Company and Green Mountain Coffee Roasters, Inc. Enter into Long-Term Global Strategic Partnership
The Coca-Cola Company (KO) and Green Mountain Coffee Roasters, Inc. (GMCR) (GMCR) announced today that the companies have signed a 10-year agreement to collaborate on the development and introduction of The Coca-Cola Company’s global brand portfolio for use in GMCR’s forthcoming Keurig Cold™ at-home beverage system. Under the global strategic agreement, GMCR and The Coca-Cola Company will cooperate to bring the Keurig Cold™ beverage system to consumers around the world. In an effort to align long-term interests, the companies also entered into a Common Stock Purchase Agreement whereby The Coca-Cola Company will purchase a 10% minority equity position in GMCR.
Under the terms of the equity agreement, The Coca-Cola Company will acquire 16,684,139 newly issued shares in GMCR for approximately $1.25 billion, which represents an approximate 10% ownership in GMCR (after giving effect to the issuance). The newly issued shares have been priced at $74.98, which represents the trailing 50-trading-day volume weighted average price (“VWAP”) as of market close today.
As part of the strategic collaboration, GMCR will be The Coca-Cola Company’s exclusive partner for the production and sale of The Coca-Cola Company-branded single-serve, pod-based cold beverages.The two companies also will explore other future opportunities to collaborate on the Keurig® platform. -http://finance.yahoo.com/news/coca-cola-company-green-mounta...
There is no way to sugar-coat this (or corn syrup-coat this) -- this is a huge win for GMCR. Huge.
For one thing, I do believe this validates that at-home carbonation systems are more than a fad. If it is worth Coca Cola's time and resources to invest over $1 billion to enter this market, it is likely more than a fad. This is a plus for SodaStream.
However, GMCR will likely capture a market that SodaStream has had a relatively difficult time grabbing (among its overall operations): repeat syrup sales. This also happens to basically be the highest margin component of this business: the "blades" in the razor and blade model. I think people will find Coca Cola syrups much more appealing than flavor mock-ups designed by SodaStream (or anyone else, for that matter).
Part of me wonders if Coca Cola ever considered or approached SodaStream as a partner. Coca Cola is paying $1.25 billion for 10% of GMCR (which, it looks like, will increase in value 40% overnight... not bad). For the same amount, Coca Cola could have easily purchased all of SodaStream, which is currently valued at $745 million and already has a carbonation product and existing customer base.
I don't think this is game over for SodaStream, but management better be scrambling to boost the business. For the first time, it looks like SodaStream will have legitimate and serious competition from the big players. What's to stop other potential players in this market -- Pepsi and Starbucks come to mind -- from following Coca Cola and entering the at-home carbonation field? SodaStream would be a logical option for a partnership or buyout from one of these other larger players in the beverage field.
Heck, I could even see some sort of partnership with Monster Beverage (another business in which I am invested). I see plenty of options for SodaStream to bounce back, but time will tell if management is strategically smart or stubborn in a boneheaded sort of way. I'm not selling my shares, but I'm not looking to add to my position anytime soon until management demonstrates its competence.
I do not, however, see this partnership as the beginning of the end for SodaStream. I think it legitimizes SodaStream's market and makes the company all the more appealing of a potential strategic partner and/or buyout candidate for the big dogs competing against Coke. It's up to SodaStream's management to capitalize on this opportunity -- the next several months will be very telling.
Long SODA and MNST