Coca-Cola Co. has agreed to pay $43 million for a stake in Honest Tea Inc., the Bethesda maker of organic low-calorie bottled tea.
The deal gives Coca-Cola 40 percent of Honest Tea and an option to buy the rest of the company after three years, said Seth Goldman, Honest Tea's co-founder and chief executive officer, in an interview yesterday. The deal values Honest Tea at $108 million.
Goldman also said that Coca-Cola's investment will "help take our brand and our mission to a larger scale and wider audience."
Honest Tea's biggest markets are in California and the Northeast. The tea is sold to retailers through a patchwork distribution system, Goldman said. The products also are sold nationally at health food stores.
Goldman said Coca-Cola can help the company expand to areas such as Florida where its tea "should have more distribution but doesn't."
"Sometimes when you are trying to get into a market and you don't have the right distributor, it just feels like you're banging your head against the wall," Goldman said.
Sales in 2007 were $23 million, the company said yesterday.
Coca-Cola is buying a stake in the closely held tea company as the soft drink maker tries to win back consumers who have cut back on sugary sodas. Honest Tea uses small amounts of honey or cane sugar in some of its teas. An 8-ounce serving of Honest Tea generally contains 17 to 35 calories, compared with 100 calories in a similar serving of Coca-Cola.
"We expect this to be one of many acquisitions" in the next two years as Coca-Cola diversifies beyond carbonated beverages, wrote Kaumil S. Gajrawala, an analyst with UBS Securities LLC in New York, in a note to investors.
Some of Coca-Cola's Odwalla juices are organic, and its Modern Tea Workshop teas sold in China include organic ingredients.
Coca-Cola controls about 10 percent of the U.S. bottled tea market with its Nestea and Gold Peak brands, according to industry journal Beverage Digest. Coca-Cola lags behind PepsiCo Inc.'s Lipton line, Arizona teas and Cadbury Schweppes PLC's Snapple teas.
Honest Tea was founded in 1998 by Goldman and Barry Nalebuff, his former professor at the Yale School of Management, after a classroom discussion about a case study on Coca-Cola and PepsiCo. Goldman brewed the first batches of tea in his kitchen, and received his first order from Whole Foods Market Inc.
Honest Tea sold about 2.8 million cases of tea and juice in 2007, according to Beverage Digest.
To reduce its reliance on sodas in North America, Coca-Cola recently purchased Glaceau VitaminWater and Fuze juices and teas. Coca-Cola soda volume has dropped for five straight quarters in North America as consumers seek healthier alternatives.