That's going to leave a mark. An arbitrator ruled that coffee maker Starbucks (NASDAQ:SBUX) must pay Mondelez International (NASDAQ:MDLZ) $2.23 billion-plus, and an additional $527 million in prejudgment interest and attorneys' fees, for improperly terminating its supply agreement with the snacks maker in 2011. That $2.76 billion figure is just about covered by the $2.58 billion in cash and equivalents the java slinger reported on its balance sheet two weeks ago.
Starbucks put on a brave face, saying it's got enough money to pay up, but that stain will be hard to rub out regardless.
The ugly imbroglio started upon Howard Schultz's return to the coffee maker, which at the time was failing miserably, putting up numbers as stale as day-old joe. Starbucks said the old Kraft food company (which became Mondelez after that company's breakup) was badly mismanaging its consumer products division that distributes its packaged coffee to supermarkets at the same time that Green Mountain Coffee Roasters was on a rolling boil. Its rival was reporting revenues from sales of its Keurig machines, and coffee pods had jumped 72% year over year in 2010, following sales rocketing 60% higher the year before.
In comparison, Starbucks' sales were up less than 10% the same year after they tumbled 6% in 2009. Starbucks told Kraft to either include the coffee maker in its planning process or take $500 million in compensation and go its separate way.
According to Starbucks, Kraft originally agreed to the offer but then reneged, demanding an additional $250 million. Kraft remembers it differently, saying Starbucks offered $750 million, which it refused, because the business would have been worth $1.5 billion, and that the claims that the foods company was in material breach of the agreement were just trumped-up allegations to give the coffee maker a way to back out of the deal.
After the two companies failed to come to an agreement, Starbucks unilaterally terminated the pact. It took control of its packaged coffee business again, and just last month Mondelez signed a a deal with McDonald's to distribute its McCafe coffee in U.S. grocery stores to further compete against Starbucks and Dunkin' Brands for the coffee drinker's attention. Talk about adding salt to the wound.
The messy separation set in motion yesterday's arbitration ruling, which is final and can't be appealed. Seems like Starbucks could have gotten off cheaper had it offered a fair price to Kraft originally, particularly since the snack-foods maker says it grew Starbucks' packaged-goods business from $50 million when it first took on the assignment in 1998 to some $500 million by 2010.
While depleting Starbucks' coffers, the decision doesn't reduce the coffee maker's position to beggar status. The ruling values Starbucks' at-home coffee business and continued growth opportunities globally, meaning it's quadrupled in value in three years' time the business it regained. That shows it was the right thing for Starbucks to do, regardless of the financial penalty it has to pay now, and likely is the reason why the market chose not to punish Starbucks' stock much.
Perhaps, but paying out billions to a bitter rival still hurts, and will undoubtedly put some pressure on performance. And it will have to restate financial results: Instead of the $481 million profit it just recorded in the fourth quarter, it will now show a $1.23 billion loss, a big stain that will take some time to clean.
Fool contributor Rich Duprey has no position in any stocks mentioned. The Motley Fool recommends Green Mountain Coffee Roasters, McDonald's, and Starbucks. The Motley Fool owns shares of McDonald's and Starbucks. 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.