5 Reasons Why Starbucks Should Buy SodaStream

SodaStream could be in play, and Starbucks would make a perfect partner.

Apr 16, 2014 at 5:30PM

Source: SodaStream.

Shares of SodaStream (NASDAQ:SODA) popped higher today after a report out of Israel suggests that a major beverage company is in talks to buy a minority stake. 

Calcalist -- the same Israeli financial daily that reported on PepsiCo's (NYSE:PEP) interest in acquiring all of SodaStream 10 months ago -- is again taking the lead in cracking open the rumor mill. Its sources claim that a beverage giant is gearing up to buy as much as a 16% stake in SodaStream, giving it a foothold in the global leader of in-home carbonation. 

PepsiCo, Dr Pepper Snapple Group, and Starbucks (NASDAQ:SBUX) are three potentially interested parties singled out by Calcalist. On the surface, it's easy to see why PepsiCo or Dr Pepper Snapple would be interested. Coca-Cola (NYSE:KO) invested $1.25 billion for a 10% stake in Keurig Green Mountain (NASDAQ:GMCR) earlier this year. The move was made ahead of Keurig Green Mountain's release of Keurig Cold, a new system rolling out in the company's next fiscal year that makes carbonated beverages. If Coca-Cola is getting into the home carbonation game, how can PepsiCo or Dr. Pepper stay away?

Well, there is a very good reason for them to stay away from SodaStream. If PepsiCo and Dr Pepper begin selling their prized syrup for the home market -- available to not just anyone with a SodaStream machine but to anyone with a bottle of seltzer -- it would crush its retail business. It would betray the regional bottlers. Coca-Cola is going with Keurig Green Mountain instead of buying all of SodaStream for $1.25 billion because Keurig Cold will be tightly regulated through self-contained and likely quite expensive carbonation pods. SodaStream has SodaCaps, but that's just syrup in a cup. The pop stars will want more product protection than that.

This brings us to Starbucks. There are plenty of reasons why Starbucks would make sense as either a minority stakeholder in SodaStream or an outright buyer of the entire company. Let's check them out.

  1. Unlike PepsiCo or Dr Pepper, Starbucks doesn't have any existing carbonated beverages at the retail level or bottlers to burn.
  2. Starbucks is a reluctant partner with Keurig Green Mountain when it comes to super-premium K-Cups. Its own Verismo failed to gain traction. Now it has a chance to be the category leader ahead of Keurig's entry in this market.
  3. The java giant has acquired niche leaders in juice bars and tea. Soft drinks is a logical next step as it continues to evolve beyond coffee.
  4. Starbucks began testing handcrafted carbonated sodas at some of its Seattle stores last year, expanding the offering to Austin and Atlanta a couple of months last summer. Arming baristas with carbonators is already happening -- now it can make it a branded affair.  
  5. SodaStream is growing a lot faster than Starbucks. Margins were squeezed during the holiday quarter at SodaStream as a result of poor inventory allocation decisions, but that's something that would naturally improve under the more seasoned Starbucks.

Starbucks and SodaStream getting paired up makes sense. It doesn't mean it's going to happen. Calcalist was ultimately wrong about PepsiCo paying as much as $95 a share to acquire SodaStream. However, there's an opportunity for Starbucks to buy a faster-growing company leading an important product category at a price point that would be accretive to earnings. 

It's a no-brainer, with or without a caffeinated assessment.

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Rick Munarriz owns shares of Keurig Green Mountain and SodaStream. The Motley Fool recommends Keurig Green Mountain. It recommends and owns shares of Coca-Cola, PepsiCo, SodaStream, and Starbucks and has the following options: long January 2016 $37 calls on Coca-Cola and short January 2016 $37 puts on Coca-Cola. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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