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Coca Cola's Buffett-Like Green Mountain Coffee Roasters Deal?

NEW YORK (TheStreet) - "[B]lah, blah, blah, yada, yada, yada. What are we writing? None of this really matters today! What matters is that Coca-Cola took a 10% equity stake in GMCR for $1.25B and entered into a 10-year strategic partnership with GMCR to develop the Keurig Cold home beverage system with Coca Cola's global beverage brands." -- CanaccordGenuity analysts

Coca-Cola (KO) counts Warren Buffett's Berkshire Hathaway (BRK.A) as its largest shareholder. However, it's unclear if the soda giant cut a deal that is in the mold of the 'Oracle of Omaha' in partnering with Green Mountain Coffee Roasters (GMCR) in its efforts to push into the cold brewing market.

Atlanta-based Coca-Cola is gaining a 10% stake in Green Mountain Coffee Roasters at an attractive price given that it was able to acquire shares at a 50-day volume weighted average price of $74.98, well below currently trading prices. The soda giant will also have the ability to boost that stake to 16%, according to the press release announcing the deal.

What isn't explained are the economics in the partnership, which will ostensibly seek to push a new line of Keurig brewers into the cold drinks market using Coca-Cola's brands. 

In 2013, Green Mountain Coffee Roasters hinted at an effort to diversify away from its coffee and hot drinks businesses and into cold beverages. However, Wednesday's partnership is a far-quicker and more well-wrought push in that direction than most analysts had expected.

Still, it will probably be years before the full financial impact of the deal is apparent.

Green Mountain Coffee Roasters and Coca-Cola did not disclose the financial terms underpinning the partnership. What both companies did say is that Green Mountain will be the exclusive partner for the production and sale of Coca-Cola-branded single-serve, pod-based cold beverages. Green Mountain also said it has the ability to collaborate with other soda brands as it builds out its cold beverage platform.

The direct investment by Coca-Cola, combined with a lack of financial specifics and a non-exclusive partnership left some Coca-Cola analysts scratching their heads.

Still, gains from the initial 10% investment may give Coca-Cola some other income, and a beneficially structured transaction could also grow the company's earnings when the partnership takes effect in 2015. Some analysts also noted that the deal could benefit Coca-Cola's bottling assets.

Green Mountain Coffee Roasters shares were gaining nearly 30% to $104.74 in Thursday afternoon trading. Coca-Cola shares were rising over 1% to $38.11.

Green Mountain's Keurig brewers could be seen as an at-home iteration of Coca-Cola's bottling operations, according to some analyst reports.

The benefits are more apparent for Waterbury, VT-based Green Mountain Coffee Roasters.

Dogged by criticism from short sellers like David Einhorn of Greenlight Capital, the company now has found about as impressive of a strategic partner as possible in Coca-Cola.

Green Mountain CEO Brian P. Kelly emphasized the importance of both firms having an investment in cold brewing. In response to fairly probing analyst questions, he also indicated that Green Mountain retained strong economics in the partnership.

"It's a strong economic prospect for us, and we're not going to go into the details necessarily of the CapEx and we're early days obviously in the cold system. But we think that we have a line of sight to a very, very high return business," Kelly said. He also said that Coca-Cola hadn't demanded exclusivity in its partnership with Green Mountain, possibly indicating an even-handed negotiation.

"Coke understands the power of the Keurig system is to have multiple brands in it and they support that," Kelly said.

In that sense, Green Mountain may have cut a smart deal, even if the price of Coca-Cola's investment is at a discount to current trading levels and the price at which it may now buy-back shares. Had they dragged their feet, maybe Coca-Cola may have had the opportunity to cut an opportunistic and one that might more closely resemble the maneuverings of its largest shareholder, Warren Buffett.

"We believe the Coca-Cola deal transforms Green Mountain Coffee Roasters from a controversial single-serve coffee company to a global beverage growth company and should put to rest many of the allegations of fraud and accounting misconduct, thereby significantly reducing the "tail risk" and supporting a higher valuation," KeyBanc Capital Markets said.

For now that appears to be the big investor takeaway. Green Mountain's cold beverage push will be more evident in the company's calendar 2015, the company said. It also allowed investors and analysts to look beyond mixed earnings.

Stock quotes in this article: GMCR, KO 

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