Coca-Cola to Buy Vitaminwater Maker Glaceau for $4.1 Billion

Coca-Cola, which has been looking to expand its non-carbonated beverage portfolio in a bid to jump-start North American sales, said it will buy Vitaminwater maker Glaceau for $4.1 billion.

"For us, it's an outstanding opportunity," said Muhtar Kent, Coca-Cola's president and chief operating officer, in an interview on CNBC's "Squawk Box. Kent said the water, enhanced water, and energy drink categories are potential growth areas, and Glaceau has offerings in these categories.

Kent declined to be specific about Coke's financial goals for the acquisition of Glaceau, which is formally known as Energy Brands. However, he said the deal, which was approved by the boards of both companies, is expected to add to Coke's earnings per share in 2008. He said it will reduce earnings slightly this year, however.

That could be a positive sign, according to Morgan Stanley analyst Bill Pecoriello.

"We had thought the acquisition could be 3 cents to 4 cents (a share) dilutive in year one, but Coke indicated it would be accretive in its first full year," Pecoriello said. Pecoriello, who does not own Coke shares, said he sees the deal as a "strong strategic positive."

Morgan Stanley has an investment banking relationship with Coke.

The acquisition helps fill a gap in Coca-Cola's North American business, giving it a well-known brand in a segment that is expected to account for 22% of North American beverage revenue over the next five years, according to Pecoriello's estimates.

"The key is that consumers are increasingly looking for alternatives, and the key thing is to ensure that we, as a total beverage company, offer a wide array of choices," Kent told CNBC. "This is in line with that strategy of ours that in all key categories we win."

Leverage With Bottlers

Pecoriello also expects the product to give Coke more leverage in negotiating with its North American bottlers such as Coca-Cola Enterprises , which will want to distribute the Glaceau products.

Coke will take full ownership of Glaceau, which is now 30% owned by holdings of India's Tata Group, a conglomerate with interests spanning steel, software services, hotels, chemicals and insurance. The Tata stake will be acquired later than the majority stake, Coca-Cola Chief Financial Officer Gary Fayard said during a conference call.

Tata paid $677 million for its stake last year, which would have placed a value of $2.2 billion on the entire company, Coca-Cola said.

The deal could reduce Coca-Cola's financial flexibility to buy back its own shares. Coca-Cola previously said it would buy $2.5 billion to $3 billion of its stock this year, but Fayard said Friday the company now expects to repurchase at least $1.75 billion to $2 billion in shares in 2007.

Glaceau is the No. 2 maker of enhanced water behind PepsiCo's Propel. The company sold 77 million cases last year, compared with Propel's 95 million, according to industry publication Beverage Digest. However, the Glaceau brands will gain greater distribution under the Coke system.

Mark Lennihan

For example, none of Glaceau's drinks are sold outside the U.S. According to Kent, Coke could roll the brand out to international markets in the future.

In addition to Vitaminwater, Glaceau also makes the Smartwater, Fruitwater and VitaminEnergy brands.

Glaceau, of Whitestone, N.Y., will operate as a separate business unit within Coca-Cola North America, and its top three executives -- J. Darius Bikoff, Mike Repole and Mike Venuti -- plan to lead the business for a minimum of three years after the deal closes. Other key managers will remain in the business, Coke said.

Coca-Cola has been trying to improve sales in its key North America unit, which has been a weak spot for the company. Coca-Cola's 14% increase in first-quarter profit came on a double-digit rise in overall sales, but in North America, unit-case volume declined 3% in the quarter.

Separately, Coca-Cola North America said it would bring back Vanilla Coke, which it stopped selling a year and a half ago, and introduce Vanilla Coke Zero. The products, which will be sold in a variety of sizes, are available immediately.