Coca-Cola buys VitaminWater maker Energy Brands for $4.1bn

As Americans shun fizzy drinks in favour of healthier options, Coca-Cola has alighted on a new source of revenue - flavoured water.

The world's No 1 drinks maker is paying $4.1bn (£2.1bn) to acquire Energy Brands, a private company more commonly known as Glacéau, whose main product, VitaminWater, is a vitamin-enriched coloured water with low-key packaging that emphasises its status as a healthier alternative to carbonated drinks.

Coca-Cola is playing catch-up with its arch-rival, Pepsi, which diversified into non-carbonated earlier and so far more successfully.

Investors grumbled that the company had been forced to pay a higher price for Glacéau than expected, and that the all-cash deal would crimp Coca-Cola's scope for share buy-backs this year. But accepting the strategic necessity of a deal, they pushed Coca-Cola shares up 1.5 per cent in morning trading.

Glacéau's drinks are already widely distributed in the US, where it is the second best-selling manufacturer of flavoured water behind Pepsi's Propel Fitness Water. Coca-Cola believes it can leapfrog its rival by putting its massive marketing machine behind VitaminWater and Glacéau's other products, FruitWater, SmartWater and VitaminEnergy.

In addition, it plans to push VitaminWater in overseas markets.

The company, founded in 1996, is based in upstate New York and 30 per cent-owned by the Indian conglomerate Tata, which paid $677m for its stake just last year and walks away now with $1.2m.

Both Pepsi and Coca-Cola have been snaffling manufacturers of non-carbonated drinks for more than a decade, but Pepsi has done the biggest and most successful acquisitions to date. In 1998, it acquired Seagram's Tropicana juice division for $3.3bn, and doubled the business's profits in three years. And in 2001, with the acquisition of Quaker, it added Gatorade to a fridgeful of non-carbonated drinks.

Coca-Cola continues to dominate the fizzy drinks market with Dr Pepper, Fanta and Sprite, plus its classic brands, and it has enjoyed success with the launch of Coke Zero. But carbonated drinks sales are in decline in the US, and Coca-Cola's most recent figures showed the volume of its US sales falling by 3 per cent.

"Glacéau has built a great business with high-quality growth, as well as a strong pipeline of innovative products and brands," Coca-Cola's chief executive, Neville Isdell, said, adding the deal will give the company an opportunity to develop more "active-lifestyle beverages".

John Sicher, the editor of the industry publication Beverage Digest, said this deal had huge potential benefits for Coca-Cola. "It's a game-changer for Coke," he said. "Glacéau not only gives it a strong presence in its current space, but the brand is also extendable in the years to come to cover new types of emerging products and categories."

Alongside the deal, Coca-Cola lowered its target for share repurchases in 2007 to a range of $1.75bn to $2bn. It had originally promised $2.5bn-$3bn.