Starbucks' Investors Confident Despite Mondelez Settlement

This story has been updated from 9:42 a.m. with share price movement and new information.

NEW YORK ( TheStreet) -- Starbucks ( SBUX) shares regained positive ground at midday despite settling a dispute with Mondelez International ( MDLZ), the former owner of Kraft Foods, by agreeing to pay $2.75 billion for terminating the companies' coffee-selling contract.

After tumbling in pre-market trading and stumbling at market open, at midday the stock seems to be in positive territory. Shares of Starbucks were up 0.07% to $80.68 at last check. Mondelez shares were rising 1.8% to $33.02, at last check.

"The stock could be down on the news as some investors may have been hoping for a settlement closer to $1 billion than $3 billion, and we would be buyers on any dip," Jefferies analysts Andy Barish writes in a note. Jefferies has a "buy" rating on the stock.

"SBUX remains our favorite pick in restaurants, given its strong category momentum, tangible sales drivers and visible approximately 20% EPS growth in a very choppy industry environment," the note says.

Mondelez refers to itself as a global snacking powerhouse, with 2012 revenue of $35 billion. The company owns brands including Cadbury, Jacobs coffee, Nabisco and Oreo, Tang and Trident gum.

The company had spun off its Kraft Foods brand in October 2012 to form Kraft Foods Group ( KRFT). Based on the agreement terms between the companies, Kraft will direct the net proceeds from the award to Mondelez. The settlement was released publicly Tuesday evening.

The company said that it intends use the net proceeds from the arbitration award to repurchase Mondelez International common stock.

"We're pleased that the arbitrator validated our position that Starbucks breached our successful and long-standing contractual relationship without proper compensation," Mondelez International's general counsel Gerd Pleuhs said in a statement. "We're glad to put this issue behind us. We can now fully focus on growing our global snacks business."

Kraft first began marketing Starbucks roast and ground coffee in 1998 and succeeded in building a highly profitable consumer packaged goods business, from a base of approximately $50 million to approximately $500 million in 2010, Mondelez said in a release.

In November 2010, Starbucks announced its intention to terminate the agreement that provided Kraft with the exclusive rights for the sales, marketing and distribution of Starbucks roast and ground coffee in grocery and other retail outlets. Later that month, Kraft initiated arbitration proceedings to challenge the improper termination of the companies' contract, Mondelez said.

Sanford Bernstein analyst Sara Senatore said the impact of the arbitration on Starbucks is "negligible," according to a research note. If Starbucks refrained from share repurchases in 2014, the impact is about 4 cents a share to earnings, the analyst wrote.

"For Mondelez, the after-tax proceeds of approximately $1.7 billion (or $0.97 of equity value per share) used for share repurchases would add $0.05 to EPS. Kraft is likely to focus on Gevalia and single-serve offerings going forward," Senatore wrote.

Senatore rates Starbucks and Mondelez at outperform. The analyst rates Kraft Foods at market perform.

Starbucks is restating its fourth-quarter and full-year results to reflect the settlement, it said in a Securities and Exchange Commission filing on Wednesday.

Starbucks reported last month that revenue fell short of analysts' expectations for the coffee-focused retailer's September-ended fourth quarter.

The company reported net income of $481.1 million, or 63 cents a share, up 34% from the year-earlier fourth quarter. Consensus expectations were calling for the company to earn 60 cents a share.

Revenue rose 12.8% to $3.79 billion from the year-earlier quarter, slightly below expectations of $3.81 billion.

"We are pleased the arbitration has ended; however, we strongly disagree with the arbitrator's conclusion and that Kraft is entitled to $2.23 billion in damages plus $527 million in prejudgment interest and attorneys' fees," Starbucks CEO Troy Alstead said in a statement on Tuesday.

"We believe Kraft did not deliver on its responsibilities to our brand under the agreement, the performance of the business suffered as a result, and that we had a right to terminate the agreement without payment to Kraft," Alstead said. "While we disagree Kraft is entitled to damages, the amount awarded reflects the value of our at-home coffee business and the continued global growth opportunity that lies ahead for Starbucks. We have adequate liquidity both in the form of cash on hand and available borrowing capacity to fund the payment, which will be booked as a charge to our fiscal 2013 operating expenses."

As a result of the award, the Seattle-based company reported a fourth-quarter operating loss of $2.1 billion and operating margin of -55.7%, respectively. The quarter's net loss and loss per share were $1.2 billion and $1.64 a share, respectively. Full year fiscal 2013 operating loss and operating margin were $325.4 million and -2.2%, respectively, and full year fiscal 2013 net earnings and earnings per share were $8.3 million and 1 cent, respectively, Starbucks said in the filing.

"Taking our packaged coffee business back from Kraft was the right decision for Starbucks, our brand and our shareholders," Alstead continued. "The results over the past two and a half years clearly demonstrate that Starbucks at-home coffee portfolio is significantly healthier than it was before we assumed direct control from Kraft in 2011. We have the leading market share of premium packaged coffee, and our total at-home coffee portfolio has grown significantly under the direct model."

Written by Laurie Kulikowski in New York.
Disclosure: TheStreet's editorial policy prohibits staff editors, reporters and analysts from holding positions in any individual stocks.

If you liked this article you might like

Starbucks Stock Is Trending Higher (Finally)

Starbucks Stock Is Trending Higher (Finally)

To Make More Money, Starbucks Is Investigating a Change to How You Use Its Wi-Fi

To Make More Money, Starbucks Is Investigating a Change to How You Use Its Wi-Fi

Kroger Shares Tank After Earnings Release: What We Know

Kroger Shares Tank After Earnings Release: What We Know

Why Kroger's Stock Has Surprised Everyone Over the Last 6 Months

Why Kroger's Stock Has Surprised Everyone Over the Last 6 Months

Video: Will China Shut Down Apple and Starbucks as Retaliation for Tariffs?

Video: Will China Shut Down Apple and Starbucks as Retaliation for Tariffs?