Green Mountain Coffee Roasters (NASDAQ: GMCR) announced on Wednesday a new partnership with Coca-Cola (NYSE:KO) to enter the home soda market. The news didn't just affect the two companies involved; SodaStream (NASDAQ: SODA) was also jumping by more than 11% in midday trading on Thursday. Investors are speculating that the deal may increase the chances of a partnership between the home soda pioneer and PepsiCo (NASDAQ:PEP).
Is this a real game changer for the industry or are investors overreacting to the news?
Coca-Cola is buying a 10% stake in Green Mountain Coffee Roasters, for $1.25 billion. The companies have also signed a 10-year agreement to collaborate in the development and introduction of Coca-Cola's products for use in Green Mountain's forthcoming Keurig Cold machine. According to the press release, Coke and Green Mountain will also "explore other future opportunities to collaborate on the Keurig platform."
Green Mountain's Keurig Cold machine is currently under development, and the company expects it to be available during its fiscal 2015, which begins in October of this year. The machine will serve both carbonated and noncarbonated beverages, including enhanced waters, juices, sports drinks, and teas.
Coca-Cola and Green Mountain
The market seems to be clearly identifying Green Mountain as the biggest winner from the recently announced deal, as the stock was rising by nearly 30% on Thursday. Coca-Cola is the undisputed leader in the global soft drinks industry, so Green Mountain is aligning with a heavyweight champion in its strategy to enter the home soda market.
However, investors need to be cautious before making investment decisions based on such news. Shares of Green Mountain are already reflecting plenty of optimism judging by recent price performance, but there is little information as to when the new products will reach the market. It goes without saying that it's far too early to tell if Coke and Green Mountain will be successful in this new venture.
Green Mountain's steeply rising price is probably due at least partially to the massive short interest weighing on the stock. As of Jan. 15, Green Mountain had more than 37.5 million shares short, which represents a whopping short interest ratio of nearly 25% of the shares outstanding.
The bears seem to be running for cover after the announcement, and this kind of situation usually generates excessive volatility on stock prices. Chasing after shares of Green Mountain following a 29% jump in a single day doesn't sound like a smart idea considering that there is little visibility regarding the possible long-term impact of the deal.
As for Coca-Cola, the company is already enjoying big paper gains on the 16.7 million shares of Green Mountain it acquired at $74.98 per unit, but this still doesn't move the needle by much when it comes to a gigantic corporation like Coca-Cola with a market cap of more than $168.6 billion.
The company will need to be careful not to hurt its relationship with global bottlers with this new venture, and there could be some complications down the road if the home soda business takes off. On the other hand, it's good to see a big and traditional company like Coca-Cola not being afraid of innovating and running some risks in the search of growth opportunities.
SodaStream and PepsiCo
SodaStream is rising solely on speculation about the possibility that PepsiCo may be willing to partner with it as a defensive move versus Coke and Green Mountain. PepsiCo had to deny rumors about a SodaStream acquisition last year, and a partnership between the two companies could make sense from a competitive point of view, but there is nothing more than conjecture at this stage.
The fact that Coke is entering the business could provide validation for the home soda category, but it could also mean rising competitive pressure and increased advertising expenditures, as SodaStream will need to compete against largest rivals in the future.
Buying SodaStream because Coke is partnering with Green Mountain sounds like a speculative move, to say the least.
Keep calm and... just keep calm
The partnership between Coca-Cola and Green Mountain could potentially have a considerable impact on different players in the home soda business, but it's far too early to tell at this stage. The fact that stock prices are moving aggressively after the announcement does not mean that investors need to react to the news. On the contrary, patience and a long-term strategic view is usually a much more intelligent approach to investing.