May 25 (Bloomberg) -- Coca-Cola Co. agreed to buy the maker of Glaceau Vitaminwater for $4.1 billion to narrow the gap with PepsiCo Inc. in the fast-growing market for flavored water.

The world's biggest soft-drink maker will pay cash for closely held Energy Brands Inc., which controls about 30 percent of the U.S. market for waters spiked with vitamins and minerals. Today's purchase is the biggest in Coca-Cola's 115-year history.

Coca-Cola accounts for 5 percent of the U.S. market for water drinks, while PepsiCo has 45 percent with its SoBe, Aquafina and Propel brands. Sales of such drinks rose about 50 percent last year while soda dropped for the second year in a row, according to John Sicher, the editor of Beverage Digest.

``This is the position Coke's in, having to pay up because there are so few assets out there that can move the needle for them,'' said Walter Todd, who helps manage $850 million at Greenwood Capital Management in Greenwood, South Carolina. The firm previously held Coca-Cola shares. ``Coke needs Glaceau.''

Glaceau's brightly colored Vitaminwaters include grape- flavored Formula 50, endorsed by rapper 50 Cent, and other varieties with B vitamins and potassium. The 11-year-old company, based in the New York borough of Queens, had sales of $350 million last year, according to Morgan Stanley analyst Bill Pecoriello.

Coca-Cola, based in Atlanta, had $24.1 billion in sales last year. The company said Glaceau will add to earnings in the first year after the purchase is completed in mid-June.

Tata's Stake

India's Tata Group will sell its 30 percent stake in Queens, New York-based Glaceau to Coca-Cola for about $1.2 billion. Tata bought the stake in August for $677 million, valuing the company at $2.26 billion at the time.

``We view today's Glaceau acquisition as another sign the company is making the right strategic moves,'' Kaumil Gajrawala, an analyst at UBS Securities, said in a note.

Shares of Coca-Cola rose 65 cents to $51.89 at 4:22 p.m. in New York Stock Exchange composite trading. They have risen 17 percent in the past 12 months, compared with 14 percent for PepsiCo, the second-largest soft-drink maker.

Tata Tea's shares rose 4 percent to 913.65 rupees at the close of trading on the Bombay Stock Exchange.

Soft drink volume in the U.S. dropped 1.2 percent last year for Coca-Cola, and PepsiCo had a 1.3 percent decline, according to data compiled by industry journal Beverage Digest. The U.S. enhanced water market probably grew 50 percent to 60 percent last year, Sicher said in an interview today.

Shipments

Shipments at Glaceau more than doubled last year to 77 million cases, according Beverage Digest data.

`It represents a significant step forward in establishing sustainable growth in our home market, North America,'' Chief Executive Neville Isdell said on a conference call.

Coca-Cola is paying 11.7 times 2006 sales for Glaceau, according to Pecoriello's revenue estimate. The price is 81 percent higher than what the company was valued at nine months ago when Tata bought its stake.

The purchase price was ``lofty,'' given the ``beverage industry's checkered past in terms of overpaying for trendy beverage brands that don't quite live up to the initial expectations,'' JPMorgan Securities analyst John Faucher wrote in a note. Brands such as Snapple, SoBe and Odwalla haven't delivered the long-term growth their buyers hoped for, he said.

Coca-Cola said the purchase will force it to pare share repurchases this year to $1.75 billion to $2 billion, from previous plans for as much as $3 billion. Moody's Investors Service said it may cut Coca-Cola's credit ratings because of the purchase.

Distribution

Coca-Cola hasn't decided if it will change Glaceau's current distribution system. ``Everything is on the table,'' Isdell said.

Coca-Cola Enterprises Inc., the world's biggest soft-drink bottler, ``should benefit from Glaceau distribution,'' depending on how much of the business it takes over, Faucher wrote today.

``It is very difficult to determine exactly what the benefit is,'' Faucher said. ``We need further detail.''

Glaceau was founded by J. Darius Bikoff, who is also chief executive officer of the company. He intends to stay with the business for a minimum of three years, along with top managers Mike Repole and Mike Venuti, Coca-Cola said today.

``They see value in us I don't even think we completely recognize,'' Bikoff said in a conference call with reporters. ``We built a brand that people love because it works so well in the context of their lives.''

Celebrity pitchmen for the drinks include singer Kelly Clarkson, San Antonio Spurs guard Tony Parker and Daniel Briere of the National Hockey League's Buffalo Sabers.

In March, Coca-Cola bought Fuze Beverage LLC to add more juice, tea and energy drinks. Coca-Cola also bought Leao Junior SA, a Brazilian maker of Matte Leao bottled tea, to give its Latin bottlers more noncarbonated choices.

Coca-Cola's board rejected a proposal to buy Quaker Oats Co. in 2000, allowing PepsiCo to snap up Gatorade's parent company for $14 billion.

To contact the reporter on this story: Mary Jane Credeur in Atlanta at mcredeur@bloomberg.net; Josh Fineman in New York at jfineman@bloomberg.net

Last Updated: May 25, 2007 16:28 EDT