Even if Coca-Cola ( KO) 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), 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.
Coca-Cola closed on Thursday, the day before it disclosed the acquisition, at $51.22. Recently, it was at $52.04 and nearing its 52-week high. During the past year, the stock has traded between $42.27 and $53.65. PepsiCo, whose share in the noncarbonated beverage category is around 50%, has edged up from $68.45 May 24 to $68.55. Cadbury Schweppes ( CSG), maker of Snapple Tea, has fared a bit better, going from $55.54 to $57.07 during the past two sessions. Glaceau, based in Whitestone N.Y., was founded in 1996. Various media reports peg the company's revenue at around $350 million last year. Coca-Cola's sales totaled around $24 billion. However, the important comparison is how Glaceau does against similar products from Pepsi. According to Beverage Digest, Glaceau sold 77 million cases last year, vs. 95 million for Pepsi's Propel Fitness Water. Coca-Cola will acquire 70% of Glaceau by mid-June. The remaining 30% will be bought by November from India's Tata Group. Atlanta-based Coca-Cola noted in a press release that the deal will add to its earnings in the first full year following the transaction. The company also lowered its share repurchase forecast for 2007 to a range of $1.75 billion to $2 billion from the previous guidance of $2.5 billion to $3 billion.