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The Coca-Cola Company has acquired a substantial stake in the fast-growing US producer of organic ready to drink teas, Honest Tea, confirming industry speculation reported in the last issue of beverage innovation.

Coca-Cola has bought 40% of Honest Tea, with an option to buy the majority of the company in three years. Terms of the transaction were not revealed, but the normally accurate Wall Street Journal said Coke was paying about $43 million for the initial stake.

The deal adds to Coca-Cola’s portfolio of healthy non-carbonated beverages, following last year’s acquisitions of FUZE for $200 million and Glacéau enhanced waters for $4.1 billion.

Honest range Based in Bethesda, Maryland, Honest produces a line of lightly sweetened, all-organic RTD teas, as well as Honest Ade organic fruit drinks and Honest Kids pouch drinks. Honest is the bestselling tea brand in America’s natural foods channel, and has begun expanding into mainstream grocery and convenience stores.

Coca-Cola has lagged in the booming RTD tea category, which grew a further 24% over the first nine months of 2007 while regular soft drinks declined 6%, according to the US industry newsletter Beverage Digest.

Coke’s arch rival PepsiCo leads the category with Lipton Iced Tea and a share of almost 40% – followed by the independent AriZona Beverage Co and Cadbury Schweppes with Snapple. Although Coca-Cola distributes Nestlé’s Nestea, as well as its own Gold Peak brand, the company presently languishes in fourth place with a share of some 11%.

* Details of the deal* The deal with Honest Tea was negotiated by Venturing and Emerging Brands (VEB), a special unit of Coca-Cola North America (CCNA) that was set up last year to invest in new beverages with high growth potential.

“Honest Tea is the leader in the fast-growing organic tea space, an area where CCNA does not currently compete,” said Coke spokesman Scott Williamson. “We believe CCNA’s tea brands, as well as Honest Tea brands, can thrive in the current beverage landscape.”

VEB’s investment will not have much initial impact on the results of CCNA. Although Honest Tea reportedly grew 70% last year, revenue was a modest $23 million from sales of 2.5 million cases (compared with Glacéau’s 100 million cases). However, the deal will have massive ramifications for Honest Tea.

The company was set up ten years ago by business guru Dr Barry Nalebuff of Yale University – economist, analyst, Forbes columnist and expert on game theory – in partnership with former student Seth Goldman.

Honest Tea prided itself from the beginning on its “green” credentials. It was the first to introduce a certified organic bottled tea, produced with leaf from sustainable plantations in India, and also first with a Fair Trade bottled tea. Honest staff rode to the office on bicycles provided by the company, and worked at desks from the second-hand store.

Goldman, Chief Executive of Honest, refutes suggestions that he, Nalebuff and the company’s financial backers are now selling their principles as well as their stock by doing business with Coca-Cola. Goldman points out that he and Chairman Nalebuff will remain in control for at least the next three years, supported by long-time Board member and advisor Gary Hirshberg, whose full-time job is running yogurt maker Stonyfield Farm.

Goldman prefers to focus on the possibility of spreading Honest’s message to many more consumers. Despite its success in health food stores, the company has found it hard to penetrate the wider market. But that could change swiftly when Honest is channelled through Coca-Cola’s unrivalled distribution system.

Goldman speculates that the company’s 2007 requirement of 2.4 million pounds (1,000 tons) of organic tea leaves might easily be multiplied tenfold, giving a useful boost to sustainable agriculture in India. Equally, increased consumption of Honest’s natural, low-calorie beverages might help make Americans a fitter, leaner nation.

“They are doing this because they recognise the value of what we’re doing,” said the CEO – or “TeaEO,” as he was archly referred to in the official release. “The goal is to build Honest Tea and let them tap into what we’re doing. This isn’t selling out – they’re buying in.”