Starbucks and SodaStream Look Like a Winning Team

Source: SodaStream.

SodaStream (NASDAQ: SODA  )  stock jumped by 10.7% on Wednesday due to rumors about a possible acquisition by Starbucks (NASDAQ: SBUX  ) . There is no official confirmation, and these kinds of rumors have been around for a long time; however, a partnership between Starbucks and SodaStream sounds like a winning move for both companies.

Big players are joining the home soda revolution
Coca-Cola (NYSE: KO  ) and Keurig Green Mountain announced on Feb. 27 an agreement under which the soda giant would pay
$1.25 billion for a 10% stake in the coffee company. The companies will collaborate in the development and introduction of Coca-Cola products for use in Green Mountain's forthcoming Keurig Cold machine, which is expected to enter the market during Green Mountain's fiscal 2015, beginning in October 2014.

When it comes to soft drinks, Coca-Cola is an undisputed world champion. Coca-Cola Classic and Diet Coke are the two most consumed soda brands in the U.S., and the company has a gigantic portfolio of 17 brands making more than $1 billion annually on a global scale.

The fact that Coca-Cola is venturing into the home-carbonation market with all its brand power and marketing resources could be a big positive in providing validation and attracting the attention of customers to the segment.

The Coca-Cola-Keurig Green Mountain deal will place considerable pressure on SodaStream, now the leading maker of at-home carbonation devices. But the move is also generating plenty of speculation regarding the possibility of another big player joining forces with SodaStream.

For companies looking to enter the segment, SodaStream offers a fairly unique opportunity. The company has the first-mover advantage in the business, and its technology, patents, and distribution network provide a big benefit for potential partners looking to make a quick and effective entry into at-home soda making.

A sparkling idea
According to Israeli business publication Globes, Starbucks is in advanced talks to purchase 10% of SodaStream for $1.1 billion. This latest report comes after a similar report from the Israeli business journal Calcalist last week that SodaStream was exploring a sale to a bigger player, so the rumor mill is stronger than ever when it comes to SodaStream and the possibility of an acquisition.  

Just because the rumor is getting louder does not necessarily mean it's true. However, there are several reasons that a deal between Starbucks and SodaStream makes a lot of sense.

Big soda companies need to be careful when venturing into home soda in order to avoid hurting their traditional business too much. This means Coca-Cola will probably sell its home products at relatively high prices to avoid cannibalization and conflicts of interests with its bottlers. This will clearly be a drawback for Coca-Cola when it comes to competing in the home-soda category.

Starbucks does not have this problem, so the coffee powerhouse enjoys the freedom to play as strongly as it wants in the home-soda category. Starbucks is experimenting with premium handcrafted, cold carbonated beverages in select locations, and management is remarkably encouraged by customer response and opportunities for expansion.

Starbucks is also successfully expanding into new product categories via acquisitions such as Evolution Fresh, La Boulange, and Teavana, so a deal with SodaStream would fit quite well into that strategy.

SodaStream is generating substantial growth. While profit margin was under pressure in the last quarter, the company is doing a great job at expanding its partnerships with different industry players and gaining recognition among customers.

Innovative high-growth companies such as SodaStream are usually considered attractive candidates for bigger and more stable businesses; its market cap of less than $900 million makes the deal affordable for Starbucks, so a purchase could make sense from a financial point of view.

As for SodaStream, a deal with Starbucks would provide the chance to build a partnership with one of the most valuable brands in the consumer sector. So the company has a lot to gain when it comes to product development, image, and recognition.

Foolish takeaway
Starbucks is successfully venturing into acquisitions to expand its portfolio of products, and management is excited about the possibilities in the carbonated drinks market. SodaStream offers a unique opportunity for a fast and effective entry into the category, and the company would have a lot to gain from a partnership with a powerful brand such as Starbucks. A deal between Starbucks and SodaStream makes plenty of sense on multiple fronts.

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  • Report this Comment On April 24, 2014, at 7:42 PM, coachtom4 wrote:

    Paragraph 7...

    The entire market cap is under 900 million, they aren't buying 10% of the company for 1.1 billion. 110 million would make more sense.

  • Report this Comment On April 25, 2014, at 7:44 AM, TMFacardenal wrote:

    Yes that´s right. My main point is that Sarbucks has market cap of almost $54 billion versus $0.9 billion for SodaStream. Starbucks could easily buy 10% or more of SodaStream.

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Andrés Cardenal

Andres Cardenal, CFA is a tenacious researcher of the best investment opportunities around the world. Andres is an economist and CFA Charterholder living in Buenos Aires, Argentina. Naturally flavored. Follow me on Twitter for more investment ideas:

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Related Tickers

9/3/2015 3:59 PM
SBUX $54.69 Down -0.57 -1.03%
Starbucks CAPS Rating: ****
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KO $39.16 Up +0.26 +0.67%
Coca-Cola CAPS Rating: ****