Analysts Not Surprised Coke Ups Its Stake In Keurig

May 21, 2014

Industry analysts say they are not surprised that Coca Cola acted quickly to increase its stake in Keurig Green Mountain, Inc.

In February Keurig, formerly known as Green Mountain Coffee Roasters, announced an agreement in which the Coca Cola Company purchased 10 percent interest in the Waterbury-based company for $1.25 billion.

The ten-year deal gives Keurig Green Mountain exclusive global rights for Coke products designed for a new cold beverage single-cup system the company will introduce in 2015.

The agreement also gave Coca Cola an option to increase its stake to 16 percent ownership of Keurig Green Mountain.

In a filing last week, Coke said it is exercising that option, which will make it the largest shareholder in Keurig.

Kenneth Shea, a senior analyst for Bloomberg Industries in Princeton, New Jersey, says Coke has a history of owning equity stakes in its strategic partners and Keurig’s new cold system opens up a potentially lucrative market for the soda maker.

"I think Coca Cola sees this as a risk to not be there. I think it sees Keurig as being the first mover and first movers generally have an advantage to create the market." Analyst Kenneth Shea.

“The large soft drink companies, Coke and Pepsi in particular are looking for new avenues of growth,” says Shea. “They see a big potential for a new channel; that is the home crafting of beverages on the cold side.  I think Coca Cola sees this as a risk to not be there.  I think it sees Keurig as being the first mover and first movers generally have an advantage to create the market.”

Shea says soda sales have been tepid in recent years.  Consumers have more choices and they’re also more concerned about calories and sugar.  He says there are clear benefits for Coca Cola to get on the cold single serve bandwagon early.

Shea says for Keurig Green Mountain the partnership with Coke is important to building confidence in a yet-to-be-introduced technology.

“The relationship with Coca Cola certainly gives investors the confidence that the cold system could indeed be a game changer,” says Shea.

Keurig Green Mountain CEO Brian Kelley is a former Coca Cola Company executive.

In a conference call last February Kelley said Keurig sees great potential in the cold beverage system.

“We’re at early days, obviously, in the cold system, but we think we have a line-of-sight to a very, very high return business,” Kelley said.

So far Coke is Keurig’s only announced beverage partner for the cold system, but Kelley  said the company will partner with other beverage makers in an approach similar to the one it’s taken with the hot beverage platform.

The company says initially the cold systems will be made at a production center in Vermont.

When the agreement was announced earlier this year there was speculation that Coca Cola might be interested in buying a controlling interest in Keurig Green Mountain.

Marc Riddick, a senior analyst at Williams Capital in New York, says that may happen but not anytime soon.

“I don’t think it’s an issue in the short term, but you’re talking about a 10 year relationship.  I think if things go well down the road, its certainly a possibility.  I don’t see any reason why it wouldn’t be,” Says Riddick.

Analyst Kenneth Shea isn’t so sure that buying the Vermont company is part of Coke’s long term plan.

“I would be a little skeptical that that would be Coke’s end game,” he says.

Shea says Coke isn’t likely to take over a business like Keurig Green Mountain , which can be more capital intensive.

He believes Coke will stick to making soda and let others make the appliances to dispense it.