Coca-Cola moves into enhanced-water market

ATLANTA - Coca-Cola Co. agreed to buy the maker of Glaceau Vitaminwater for $4.1 billion to narrow the gap with PepsiCo Inc. in sales of noncarbonated drinks.

Coca-Cola said yesterday that it would pay cash for closely held Energy Brands Inc., which was founded in 1996 and controls about 30 percent of the U.S. market for so-called enhanced waters, which are spiked with vitamins, minerals and sometimes flavors.

Coca-Cola executives said the price tag, which is nearly twice what Glaceau's estimated value was less than a year ago and represents Coke's largest acquisition ever, is worth it.

"We're looking at this as a long-term opportunity," chief operating officer Muhtar Kent told reporters in a conference call.

John Sicher, an industry analyst and editor and publisher of Beverage Digest, said the price is a function of Glaceau's "astronomical" growth.

"There are simply no other privately owned brands out there which could give Coke the kind of potential Glaceau does," Sicher said. "In addition, Coke can create more value by putting it into its strong international bottlers. That will further help make this deal pay off."

The acquisition will be financed with debt, Coca-Cola said.

For now, the company will acquire 70 percent of Glaceau. The rest - owned by holdings of India's Tata Group - will be acquired later, said Gary Fayard, Coca-Cola's chief financial officer. Tata will get $1.2 billion of the $4.1 billion purchase price, officials said.

Tata paid $677 million for its Glaceau stake last August, a deal that at the time valued the entire company at $2.2 billion, Coca-Cola said.

Fayard said the company expected cost savings from the Glaceau deal to develop later, and he added that Coca-Cola would invest those savings in further growth of Glaceau's brands.

Based in Whitestone, N.Y., Glaceau is the maker of Vitaminwater, Fruitwater, Smartwater and Vitaminenergy.

The deal to buy Glaceau, which would operate as a separate business unit within Coca-Cola's North America segment, is expected to close in the summer. It is subject to regulatory review. The boards of both companies have approved the transaction.

Glaceau is attractive for Atlanta-based Coca-Cola because of its position in the enhanced-water and energy-drink categories, which Coca-Cola is betting will make up a large portion of the beverage industry's growth in North America through 2010.

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