Starbucks to Pay $2.79 Billion to Settle Dispute with Kraft

Starbucks (Nasdaq: SBUX) has been ordered to pay Kraft Foods Group (Nasdaq: KRFT) $2.8 billion for prematurely terminating a contract with the food company back in 2011. The award includes $2.23 million in damages to be directed to Mondelez International, which owned Kraft when the contract was in place, and $527 million in prejudgment interest and attorneys' fees.

According to a press release, the payment will be booked as a charge to Starbuck's fiscal 2013 operating expenses.

Kraft began selling bags of Starbucks coffee in grocery stores beginning in September 1998. Starbucks prematurely ended the contract in March 2011 and gave the business to privately held Acosta Inc. If carried out, the contract would have expired in March 2014 and would have automatically renewed for another 10 years.

Starbucks accused Kraft of multiple material breaches of contract on suspicion that Kraft was mishandling the brand by failing to properly market packaged-coffee products. Starbucks also said Kraft hasn't involved it in sales planning and conversations with retailers.

Kraft denied any wrongdoing and said that if Starbucks wished to end the contract, it must pay Kraft fair value for the business, which at the time generated $500 million a year in revenue, up from just $50 million in 1998.

Starbucks later offered to buy back the rights to the packaged coffee business for $750 million, but Kraft did not accept the offer and the dispute moved to the arbitration process.  Arbitration was completed yesterday, Nov. 12, which Starbucks cannot appeal.

Starbucks shares were down 1.2 percent at $79.41 in extended trading Tuesday on the announcement, while Mondelez shares rose about 3.3 percent.

For more see:
This Starbucks press release
This Wall Street Journal article
This New York Times article

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