An arbitrator slapped Starbucks (NASDAQ: SBUX ) with a $2.76 billion fine on Tuesday, ending a three-year dispute between the java giant and the pre-split Kraft Foods. The ruling comes after a long-running clash between the companies, which began in 2010, when Starbucks terminated an agreement with Kraft for distribution of Starbucks-branded products in grocery stores. At the time, Starbucks had offered to pay Kraft $750 million to end their partnership -- an offer Kraft turned down.
Starbucks now has to pay billions, and restate fiscal fourth-quarter earnings. Let's look at the implications this has for the coffee chain and its shareholders.
To Mondelez go the spoils
Mondelez International (NASDAQ: MDLZ ) shareholders are the real winners here. Kraft spun off its North American grocery business last year, and changed its name to Mondelez, which means the windfall of cash from the arbitration will go to Mondelez. The snack company plans to use the proceeds to reward shareholders with share buybacks.
The ruling orders Starbucks to pay $2.23 billion in damages to Mondelez, and $527 million in legal fees. As a result, Starbucks must restate its fiscal fourth-quarter earnings. Based on an 8-K form the company filed on Wednesday, Starbucks now shows a loss of $1.64 per share for its fourth quarter, ended Sept. 29. However, the company should still be able to maintain its guidance for fiscal 2014 earnings in the range of $2.35 to $2.65 per share, thanks to its solid balance sheet and ability to generate strong cash flow.
Why this is good for shareholders
During the call with investors today, Starbucks CEO Howard Schultz emphasized how this one-time charge to Mondelez gives Starbucks full operating control of its multibillion-dollar global consumer packaged-goods business. Schultz pointed to the future opportunity this creates for Starbucks to build a "one-of-a-kind CPG business" that is fully integrated into the company's retail business.
One way to look at this is as an M&A cost. Starbucks is essentially acquiring its packaged coffee business from Kraft in a deal that will create long-term value for Starbucks investors. Ultimately, this is in the best interest of its shareholders.
In fact, Starbucks has gained the leading market share of premium-packaged coffee since taking back control from Kraft in 2011. Not to mention, sales in this segment increased 62% during that time. Starbucks' global channel development is now the company's second largest operating segment -- a feat that wouldn't have been possible with Kraft playing the middleman. Going forward, management is confident that it can achieve double-digit top-line and bottom-line growth in this segment under the direct model.
Growth you can't afford to miss
Despite this costly one-time charge, Starbucks is still on track to achieve record growth in the years to come.
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