Coca-Cola takes stake in Honest Tea

Honest Tea founder and CEO Seth Goldman will remain in control of his company for now, but Coca-Cola has an option to complete the buyout.

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(FORTUNE Small Business) -- The Coca-Cola Company (KO, Fortune 500) said Tuesday it will buy a 40% stake in Honest Tea, a 10-year-old organic bottled tea upstart that grew its sales 70% last year.

Coca-Cola will have the right to buy the rest of the Bethesda, Md., company after three years. But for now, the maker of low-calorie drink brands such as Honest Tea, Honest Ade and Honest Kids will continue to operate as an independent business under its existing leadership. Financial terms of the investment, which had been rumored since December, were not disclosed.

"This is not a purchase: this is an investment in our brand," said Honest Tea founder and CEO Seth Goldman, who started the company in 1998 with co-founder Barry Nalebuff. Last year, Honest Tea Inc. sold 32 million bottled drinks, grossing $23 million.

Partnering with Atlanta-based Coca Cola will give Honest Tea access to wider distribution beyond the natural food stores, such as Whole Foods (WFMI, Fortune 500), in which it already has a strong presence. The company will now be able to reach American colleges, universities and restaurants with which Coca-Cola has exclusive relationships. Honest Tea has been seeking that kind of mainstream presence in recent years, expanding into convenience and grocery stores such as Target (TGT, Fortune 500).

"We felt the need for additional resources," said Goldman, who was approached by Coca-Cola North America's "Venturing and Emerging Brands" (VEB) business unit in the fall of 2007. "We recognized that a larger partner could help us do more."

Honest Tea started out working with cheese, corned beef and charcoal distributors in the late nineties because mainstream beverage distributors didn't anticipate consumer interest in a 10-calorie, tea-based drink. Today's announcement reflects increased demand for healthier and low-calorie products, a trend that has driven a number of recent corporate acquisitions of smaller, natural-foods companies.

For example, in 2007 Bear Naked, an all-natural granola company, was bought by Kashi Company, itself an organic food company that was acquired by the Kellogg Company (K, Fortune 500) in 2000. Starbucks (SBUX, Fortune 500) took over thecharitably minded Ethos Water in 2005.

Gary Hirshberg, one of Honest Tea's board members and investors, is president and CEO of organic yogurt company Stonyfield Farm. In 2001, Stonyfield entered a similar partnership to that of Coca-Cola and Honest Tea with the French company Groupe Danone, which now owns a majority stake in Stonyfield.

"Honest Tea is on the forefront of the rapidly growing organic beverage business," Deryck van Rensburg, Coca-Cola's VEB president and general manager, said in a prepared statement. "This transaction is a superb example of our mission in VEB to seek out and invest in the best beverage entrepreneurs and the highest growth-potential beverages."

While Goldman acknowledged that some customers will be concerned to see a small, ethically-run company sell a stake in its business to a multinational, he believes that the deal will have a net positive effect in expanding the organic market.

"You partner with the whole organization, but we're marketing the part that's the solution," he said. "This isn't us selling out - this is them buying into what we're doing."