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Coke Deal Was Pricey but Right

Even if Coca-Cola (KO - Get Report) is paying a high price for enhanced-water maker Energy Brands, analysts appear to believe the purchase will be worth it.

The cola wars of yesteryear have given way to a battle for the healthier and freer-spending consumer, one for whom tap water will no longer do. Even ordinary -- if it can be called that -- bottled water finds itself facing ever stiffer competition from the likes of Energy Brands' convenience-store staple Vitaminwater.

New options in the sports-drink category are constantly being churned out, but at the moment the neighborhood bully is PepsiCo (PEP - Get Report), whose offerings include Gatorade and Propel Fitness Water.

Coca-Cola, wanting a bigger piece of the action, said Friday that it will buy Energy Brands, which does business as Glaceau, for $4.1 billion in cash. Judy Hong of Goldman Sachs wrote in a research report that "though we think the purchase price is too high, we also see the deal as a moderate positive."

Erin Ashley Smith of Argus Research agrees that the terms seem inflated but could still pay off. "While the acquisition price appears high, we think it is justified; the Glaceau brands are in fast-growing, high-margin channels."

An AC Nielsen report states that both water and sports drinks grew at double-digit rates between 2004 and 2006, and Coca-Cola clearly expects beverages of these types to continue serving as strong alternatives to soda.

"These categories of water and energy drinks are expected to make up a large portion of the beverage industry's volume and gross profit in North America through 2010," the company said.

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