Starbucks says $3.37 billion Kraft split was necessary

Customers visit a local Starbucks coffee shop in Del Mar, California November 13, 2013. Starbucks Corp on Wednesday said breaking up with Kraft was hard to do, but worth the high price, after an arbitrator ruled it must pay a whopping US$2.76 bi
Customers visit a local Starbucks coffee shop in Del Mar, California November 13, 2013. Starbucks Corp on Wednesday said breaking up with Kraft was hard to do, but worth the high price, after an arbitrator ruled it must pay a whopping US$2.76 billion (S$3.37 billion) for ending the companies' grocery coffee partnership early. -- PHOTO: REUTERS 

(REUTERS) - Starbucks Corp on Wednesday said breaking up with Kraft was hard to do, but worth the high price, after an arbitrator ruled it must pay a whopping US$2.76 billion (S$3.37 billion) for ending the companies' grocery coffee partnership early.

The world's biggest coffee chain will restate results for the latest quarter to show an operating loss and issue debt following the bigger-than-expected award.

The payment resolves a three-year spat between the two United States (US) brand titans and illustrates how costly it can be to sever a contract.

"It's difficult when a decision like this goes against you. But it is a one-time charge in a single moment in time, and now it's behind us," Starbucks chief executive Howard Schultz said on a conference call with analysts on Wednesday.

Starbucks has been posting strong revenue and profit gains despite the lacklustre US economy, and Mr Schultz said the split cleared the way for the chain to significantly expand packaged coffee product sales in the grocery aisle.

It "was, without question, the right strategic decision for Starbucks, our brand and our shareholders", Mr Schultz said.

Starbucks shares closed up 1.1 per cent at US$81.46, after several analysts said the company's long-term growth prospects remained promising.

Kraft Foods Inc split into two companies in October 2012, Kraft Foods Group Inc and Mondelez International Inc . Under an agreement between those two companies, Mondelez will receive all proceeds from the resolution of the Starbucks-Kraft dispute.

Shares of Mondelez, which makes Cadbury chocolates, Oreo cookies and Trident gum, gained 2.7 per cent to close at US$33.31.

An arbitrator ruled on Tuesday that Starbucks must pay US$2.23 billion in damages plus US$527 million for interest and legal fees for terminating its retail packaged coffee sales, marketing and distribution agreement with Kraft at least three years early.

Restated results for Starbucks' fourth quarter ended on Sept 29 would show a net loss of US$1.64 per share, the company said on Wednesday.

The Seattle-based company previously reported a fourth-quarter profit of 63 US cents per share. Starbucks said it had enough cash on hand and available borrowing capacity to fund the payment, which was bigger than Wall Street expected.

The company will issue US$750 million in new debt in the next three months, chief financial officer Troy Alstead said on the analyst call.

Starbucks also said it would not change its investments as a result of the ruling and repeated its forecast for fiscal 2014 earnings.

Kraft began marketing and distributing bags of Starbucks coffee in grocery stores in September 1998, but Starbucks ended the contract in March 2011, giving the business to privately held Acosta Inc.

The deal was set to expire in March 2014. But if it was not terminated by either party, it would renew automatically for successive 10-year terms.

Mr Schultz first alerted Kraft to his unhappiness with the partnership in January 2010. The company accused Kraft of multiple material breaches of contract, including mismanaging the brand, and in August 2010 proposed a payment of US$750 million to end the deal.

Kraft rejected that offer, denied any breach and said that if Starbucks wanted out, it must pay a fair value for its share of the business that brought in annual revenue of US$500 million.

Kraft said fair payment would be closer to US$3 billion.

Based on the rules of binding arbitration, Starbucks cannot appeal the decision.

The date of the payment to Mondelez has not yet been determined, Mr Alstead said.