Starbucks to Restate Results on Kraft Payment

Starbucks Corp. leaders say it may be hard to get over the sticker shock, but that the company will be better off in the long run without Kraft Foods. The company announced late Tuesday that it must pay at least $2.23 billion to settle a dispute with Kraft over coffee distribution.

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(AP) — Starbucks Corp. leaders say it may be hard to get over the sticker shock, but that the company will be better off in the long run without Kraft Foods.

The Seattle coffee company announced late Tuesday that it must pay at least $2.23 billion to settle a dispute with Kraft over coffee distribution. And according to a regulatory filing Wednesday, Starbucks will restate its fiscal fourth-quarter results to show a loss reflecting the damages. The company also said it will issue $750 million in additional debt over the next three months to help with the payment.

Starbucks and Kraft have been locked in dispute since 2010 when Starbucks ended its contract with Kraft to distribute its packaged coffee to grocery chains. The contract was originally set to expire in 2014.

The coffee company said that Kraft failed to uphold its duties under the contract. Kraft took the matter to arbitration to challenge the termination and the two split ways in 2011.

The two companies said Tuesday that an arbitrator determined that Starbucks must pay $2.23 billion in damages and $527 million in attorney fees. Starbucks estimated those attorney's fees at $557 million in a regulatory filing Wednesday, bringing its potential total payment up to nearly $2.79 billion.

Mondelez International Inc., which spun off Kraft Foods Group last year, will get the award. The Deerfield, Ill., company said that it plans use the money left after expenses and taxes to buy back stock. The exact payment date has not yet been determined.

Starbucks leaders said on a conference call Wednesday that they are disappointed with the decision, but that the company remains in a very healthy financial position. They said the company has adequate liquidity, both in the form of cash on hand and anticipated issuance debt, to fund the payment. They also said that Starbucks is in the very early stages of building its own global packaged goods business, which requires it to have full control of its operations.

"It's a single one-time charge in a single moment of time and now it's behind us," CEO Howard Schultz said. "Our goals, capabilities and aspirations are well beyond where Kraft could have taken us."

Starbucks said it will restate its fourth-quarter results to reflect the payment. As a result, it will post a loss of $1.64 per share for the quarter ended Sept. 29 compared with earnings of 63 cents per share originally reported in October. The company stood by its 2014 earnings forecasts.

While the payment was larger than analysts had anticipated, most believed it would have limited impact on Starbucks.

Starbucks has ample liquidity to handle the payment and the incident should do little to slow the thriving company, William Blair analysts said in a research note. BMO analyst Phillip Juhan maintained an "Outperform" rating on the stock and said the company's potential for higher margins and return on invested capital under its new structure will outweigh the higher-than-expected settlement charge.

Shares of Starbucks increased 85 cents to close at $81.46 Wednesday, in line with market trends. Its shares are up more than 50 percent in 2013. Mondelez shares added 88 cents, nearly 3 percent, to close at $33.31.

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