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Coca-Cola Takes Aim at SodaStream by Pouring $1.3B Into Competitor

Coca-Cola Co’s $1.3 billion investment in Green Mountain Coffee Roasters Inc puts pressure on at-home soda leader SodaStream International Ltd to bolster its position through a partnership or merger with the likes of a PepsiCo Inc or Dr Pepper Snapple Group Inc.

Coke’s deal to buy 10 percent of the popular Keurig one-cup coffee brewer and exclusively sell Coke products on its upcoming cold drink machine is fueling speculation that the world’s largest soda company could eventually buy the rest of Green Mountain, spurring other deals in the sector, analysts said.

The Coke deal eliminates SodaStream’s “best potential partner and creates a new level of competition,” Canaccord Genuity analyst Scott Van Winkle said in a note.

Shares of SodaStream were up 9.8 percent at $39.30 on Thursday afternoon on the Nasdaq, buoyed by takeover speculation.

Representatives from Pepsi, Dr Pepper Snapple and SodaStream did not immediately respond to requests for comment. Pepsi had last year shot down rumors that it had approached Israel-based SodaStream with a $2 billion buyout offer.

Soda sales have been declining in the United States since 2005, and Coke has made a handful of bite-by-bite acquisitions – including Honest Tea – to expand the types of drinks it offers.

While companies such as Starbucks Corp and Dunkin’ Brands Group Inc have deals to provide coffee pods for the Keurig, Coke took the extra step of investing in Green Mountain as it prepares to launch a single-serving cold drink machine as soon as October.

That move from Coke “causes us to wonder if this could be the first step in ultimately acquiring a larger stake in (Green Mountain),” Wells Fargo Securities analyst Bonnie Herzog wrote in a client note.

Shares of Green Mountain were up 26.8 percent at $102.56 in afternoon trading, after jumping more than 50 percent in extended trade on Wednesday after the Coke deal was announced.

The gains prompted some short sellers to make fresh bets that Green Mountain’s stock price would drop.

“It is uncertain that the home soda market is all that large and whether it is taking market share,” said Douglas Kass, president of hedge fund Seabreeze Partners Management.

Kass said he shorted Green Mountain stock at $128 a share on Wednesday night.

“The heaviest users of SodaStream use it for sparkling water, as the flavor market and usage has been slow to develop,” Kass said in a note to clients.

John Sicher, editor and publisher of Beverage Digest, called the Coke-Green Mountain deal a win-win, saying it gives the soda company a new avenue for growth with new technology that is cutting-edge and cool.

But skeptics point out that Green Mountain’s cold drink machine is still unproven and that Coca-Cola’s challenge has been to come up with new drinks to tempt customers – not to find ways to tempt them with higher-priced, premium drinks.

“In our opinion, one of Coke’s problems … is not routes-to-market but innovation in the bottle,” Stifel analyst Mark Swartzberg said in a client note.

Another Stifel analyst, Jim Duffy, estimated SodaStream’s global retail sales at about $100 million annually. That suggests Coke’s potential retail sales on Green Mountain’s new cold beverage machine would make just a small contribution to its revenue, which was $12 billion in the third quarter.

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