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What Coke's and Green Mountain's Partnership Means for SodaStream

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February 06, 2014 – Comments (4) | RELATED TICKERS: SODA , GMCR , KO

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. 

Best,
David K 

Long SODA and MNST 

4 Comments – Post Your Own

#1) On February 06, 2014 at 12:11 PM, awallejr (79.68) wrote:

Soda might want to talk to Pepsi.  KO has the muscle to get shelf space.  Good luck on your long but if you still are in the green you might want to profit take.

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#2) On February 06, 2014 at 1:36 PM, Schmacko (55.64) wrote:

I have a hard time wrapping my head around how good a deal this is for coke.  I own a kuerig, I know a fair amount of other people that own a kuerig.  I know no one that owns a soda stream.  I drink coke pretty much every day, but I have a hard time imagining I would want one of these. 

K cups on a per cup basis are more expensive than just buying bags of coffee grounds, which is why my family switched to using the inserts that allow us to use our own coffee.  I get the problem the kuerig solves for though.  People who want coffee at home have to brew it.  The Kuerig brews faster than brewing a pot, allows you to brew just one cup and in a different flavors for multiple people and takes up roughly the same counter space as a traditional coffe pot.

People don't make soda at home.  So you're at best saving pantry/refridgerator space in exchange for another counter top appliance... counter space is more of a premium in my household.  I routinely pick up a 6 pack of 16oz coke bottles for $3.33 (on sale) from my grocery.  That works out to 55.5 cents a bottle.  You can currently buy enough sodastream cola syrup to make 6 litres (roughly 203oz.) on amazon for $9.96 (reg $12.99).  I'll just assume coke/green mountain will be similarily priced.  That works out to 4.9 cents per oz or the equivalent of 78.4 cents for the same 16oz of soda I'm getting for 55.5 cents in a bottle.  It's more expensive when you factor in that you also have to buy the carbonation.  The at home price is even cheaper if you use 2 litre bottle costs as the basis, but those don't hold carbonation as well.  Regardless, from a money out of my wallet standpoint this doesn't seem like a good deal.

I get how it could be good for coke.  Its a lower cost, higher margin product than shippin cans/bottles.  I just don't really get why consumers would want to make the switch.

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#3) On February 10, 2014 at 5:52 PM, EvanBuck (99.81) wrote:

My take on the Coke/Green Mountain deal.

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#4) On February 11, 2014 at 3:56 PM, Schmacko (55.64) wrote:

I think sodastream's West Bank factory controversy probably currently makes it being bought out buy a major American corporation a non starter.  I can't see Pepsi wanting the headache.  Also probably one of the reasons KO didn't want to buy them outright vs. doing the deal with green mountain.

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