Question: Assuming the Enterprise Value to Revenue multiples for beverage companies in January 2022 is 5.5 times, what would be Honest Tea's valuation if it maintains the 60% growth rate on its 2011 to 2021? Are there any impacts of Honest Tea's association with Coca-Cola?

Use the information below:

HONEST TEA INC. INCOME STATEMENT FOR YEARS:

	1998	1999	2000
REVENUES
Sales	$273,913	$1,229,882	$2,118,094
Sales discounts	-$7,807	-$149,027	-$174,000
Other income	$5,862	$15,167	$47,921
Total revenues	$271,968	$1,096,022	$1,992,015
Cost of goods sold	$222,414	$745,321	$1,211,840
Gross profit	$49,555	$350,702	$780,174
EXPENSES
Broker commissions	$0	$38,787	$69,421
Consultants	$81,464	$43,659	$91,929
General & administrative	$29,970	$103,242	$188,853
Payroll taxes & benefits	$13,191	$41,559	$60,000
Professional fees	$35,467	$24,307	$2,269
Research & development	$22,254	$80,957	$27,080
Salaries	$125,976	$390,876	$471,259
Sales & marketing	$87,016	$399,649	$441,348
Travel & entertainment	$15,647	$65,865	$142,946
Total operating expenses	$410,983	$1,188,901	$1,495,107
EBITDA	$361,428	$838,199	$714,933

Honest Tea goes gazelle

With the closing of the $1.2 million in equity raise in 2000 to fund the national distribution and introduction of two new flavors and international sales, Honest blanketed natural food stores, festivals, and other events with samples of its Gold Rush Cinnamon, Kashmiri Chai, Black Forest Berry, Moroccan Mint Green, and Assam Black teas to show consumers that a beverage could contain less sugar and still taste good.

But as the company grew, Honest was increasingly up against premium brands in the space also riding the growing demand for tea and better-for-you beverages. Many of these had deep-pocketed owners such as Tazo, owned by Unilever; Starbucks' Teavana; PepsiCo and Unilever's Pure Leaf and Coca-Cola's Gold Peak.

Despite the competition, Honest remains a market leader in the space, commanding about 2.8% of the $1.8 billion premium tea category, according to the company.

Overall, the ready-to-drink tea market, which rang up sales of $200 million in 1990, posted revenue of $6 billion in 2008. Demand is expected to grow or remain steady in coming years as consumer interest in the beverage's healthfulness, variety, availability, and sustainability lure drinkers, according to data from the Tea Association of the U.S.A. Much of the current consumption comes from brands like Snapple, Arizona, Nestea, and Lipton, which are more well-known among the broader population.

Coca-Cola comes calling

As the company grew during the next decade, Honest's success caught the attention of Coca-Cola. The beverage giant first added Honest to its portfolio by purchasing a 40% stake in 2008 for $43 million a well-timed investment that came shortly before the Great Recession, when financing became harder to come by with an option to purchase the rest of the company.

"We weren't losing a ton of cash, but we did need to raise more money and it would have been very hard to do that" during the recession, Goldman said. "I know a lot of companies that did go out of business during that time."

Since Coca-Cola first added Honest to its portfolio, the number of stores selling its products has soared from 15,000 locations in 2008 a manageable level that allowed employees to personally visit many outlets to hand out samples to an estimated 140,000 today. Honest products are now found in stores like Walmart, Kroger, Wegmans, and Target; online retailers such as Jet.com, Amazon, and Instacart; and scores of restaurants including Wendy's, McDonald's, and Subway.

As more stores started selling its products and the items under the Honest brand expanded beyond tea to include sports drinks, lemonades, and kids' beverages, revenue soared from $38 million in 2008 with an annual compound growth rate of more than 60% by year-end 2011. With the brand posting annual growth in the double digits, Coca-Cola projects Honest to join the ranks of its billion-dollar brands in the U.S. by 2025 and likely sooner if global revenue is factored in.

Erik Gordon, a business professor at the University of Michigan wrote that the investment has worked for Honest Tea and Coca-Cola in large part because of what Coca-Cola hasn't done with the Honest brand. Coca-Cola has been careful to maintain the values Honest cultivated when it was founded and keep its mainstream customers loyal to the brand, despite expanding the product lineup and availability of the drinks to more locations.

Coke has handled (Honest) very deftly, Gordon said. Theyve taken it from being a niche brand into a mainstream brand thats putting money on the board even by Coca-Colas standard.

'The one that we used to daydream about'

When Coca-Cola first took its stake in 2008, the company brought with it a plethora of invaluable resources, ranging from employees, industry connections, consumer data, a global distribution system, and an unrivaled knowledge of different beverage categories such as coffee, juice, and sparkling drinks, which have proven invaluable for Honest as it expands its reach around the world and introduces new products.

Goldman said Coca-Cola opened up new avenues to peddle its drinks and lead to the creation of new products that might not have been possible without the soda giant. Last December, Honest became the first organic product to be carried at McDonald's after the restaurant behemoth swapped out its 80-calorie juice option for Honest Kids, which contained 45 fewer calories. Coca-Cola was able to provide cash to help Honest make an upfront purchase of enough organic juice for its kids' drink something Goldman said an independent company wouldn't be able to do making a deal like McDonald's possible.

"It's the one that we used to daydream about when we started in 1998: Is there a way we can get our product to that kind of consumer?" Goldman said.

"The idea of not pushing a brand too far, too fast, too soon is something that theyve done very well with Honest Tea, and they can take those learnings and leverage that as they bring some of these other smaller, faster-growing brands into their portfolio."

Brittany Weissman, Analyst, Edward Jones

While Honest started in tea, Coca-Cola has fostered its expansion into other drinks in the health and wellness category that falls under the organic, less sweet, and fair trade umbrella that has become synonymous with the brand. So far, the efforts have proven largely successful, with the biggest success for Honest coming in children's drinks, where Honest Kids launched a decade ago. It has overtaken tea as the company's best-selling product.

"We're capturing customers with that less-sweet palate earlier and helping to introduce them to our brand, and that certainly speaks well to our prospects in the future," Goldman said. "If children today have that less-sweet palate as they get older, that's the reason they'll continue to be connected to our offering."

Coca-Cola Wants More

On January 2, 2012, the Head of Venturing and Emerging Brands (VEB) unit of Coca-Cola North America, wrote to Seth Goldman that The Coca-Cola Company would like to exercise its option to acquire the remaining portion of Honest Tea. The move will complete a transaction that began in 2008 when Coca-Cola purchased a minority stake in the company.