November 13, 2013 / 7:23 PM / 5 years ago

UPDATE 5-Starbucks says $2.76 billion Kraft split was necessary

(Adds link to BREAKINGVIEWS column on break up.)
    By Lisa Baertlein
    Nov 13 (Reuters) - Starbucks Corp on Wednesday said
breaking up with Kraft was hard to do, but worth the high price,
a day after an arbitrator ruled it must pay a whopping $2.76
billion for ending the companies' grocery coffee partnership
    The world's biggest coffee chain on Wednesday said it would
restate results for the latest quarter to show an operating loss
and issue debt following the bigger-than-expected break-up fee.
    The payment resolves a three-year spat between the two U.S.
brand titans and illustrates how costly it can be to sever a 
   "It's difficult when a decision like this goes against you.
But it is a one-time charge in a single moment in time, and now
it's behind us," Starbucks Chief Executive Howard Schultz said
on a conference call with analysts on Wednesday.
    Starbucks has been posting strong revenue and profit gains
despite the lackluster U.S. economy, and Schultz said the split
cleared the way for the chain to significantly expand packaged
coffee product sales in the grocery aisle.
    It "was, without question, the right strategic decision for
Starbucks, our brand and our shareholders," Schultz said.
    Shares of Starbucks rose 0.6 percent to $81.11 in midday
    Kraft Foods Inc split into two companies in October 2012,
Kraft Foods Group Inc and Mondelez International Inc
. Under an agreement between those two companies,
Mondelez will receive all proceeds from the resolution of the
Starbucks-Kraft dispute.
    Shares of Mondelez, which makes Cadbury chocolates, Oreo
cookies and Trident gum, were up 2.3 percent to $33.17.
    An arbitrator ruled on Tuesday that Starbucks must pay $2.23
billion in damages plus $527 million for interest and legal fees
for terminating its retail packaged coffee sales, marketing and
distribution agreement with Kraft at least three years early.
    Restated results for Starbucks' fourth quarter ended on
Sept. 29 would show a net loss of $1.64 per share, the company
said on Wednesday. 
    The Seattle-based company previously reported a
fourth-quarter profit of 63 cents per share. ]
    Starbucks said it had enough cash on hand and available
borrowing capacity to fund the payment, which was bigger than
Wall Street expected. 
    The company will issue $750 million in new debt in the next
three months, Chief Financial Officer Troy Alstead said on the
analyst call. 
    Starbucks also said it would not change its investments as a
result of the ruling and repeated its forecast for fiscal 2014
    Kraft began marketing and distributing bags of Starbucks
coffee in grocery stores in September 1998, but Starbucks ended
the contract in March 2011, giving the business to privately
held Acosta Inc.
    The deal was set to expire in March 2014. But if it was not
terminated by either party, it would renew automatically for
successive 10-year terms. 
    Schultz first alerted Kraft to his unhappiness with the
partnership in January 2010. The company accused Kraft of
multiple material breaches of contract, including mismanaging
the brand, and in August 2010 proposed a payment of $750 million
to end the deal. 
    Kraft rejected that offer, denied any breach and said that
if Starbucks wanted out, it must pay a fair value for its share
of the business that brought in annual revenue of $500 million.
Kraft said fair payment would be closer to $3 billion.
    Based on the rules of binding arbitration, Starbucks cannot
appeal the decision.
    The date of the payment to Mondelez has not yet been
determined, Alstead said.

 (Reporting by Lisa Baertlein in Los Angeles. Additional
reporting by Aditi Shrivastava in Bangalore; Editing by Kirti
Pandey, Lisa Von Ahn, Bernard Orr and Andrew Hay)
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