March 28/The Atlanta Journal-Constitution -- Coca-Cola is continuing to cut ties with Nestle as it tries to catch up to the booming U.S. ready-to-drink tea market.

The Atlanta-based company announced Tuesday that it is once again scaling back Beverage Partners Worldwide (BPW), a joint venture created with Nestle in 2001 to develop and market ready-to-drink teas and coffees.

The reformulated partnership opens the door for a long-rumored purchase by Coke of Arizona, the No. 2 bottled and canned tea maker in the U.S.

Coke is a distant No. 4 in the U.S. when it comes to ready-to-drink tea.

Coke has reportedly been talking to Arizona about a purchase or distribution deal since at least 2005, but the BPW agreement didn't allow Coke to pursue Arizona independently.

Arizona spokeswoman Francie Patton said "no comment" when asked Tuesday whether Coke and Arizona are negotiating, and whether Arizona's owners would entertain a proposal.

Coke President and Chief Operating Officer Muhtar Kent alluded to the possibility of an acquisition in a note to employees posted Tuesday on an internal company Web site.

"We now have the flexibility we need to aggressively grow our tea and coffee business and better serve consumers throughout the world," Kent said.

An acquisition of Arizona would immediately make Coke a significant contender in the U.S. ready-to-drink tea market, which recorded roughly $4 billion in sales last year.

Coke trails PepsiCo, Arizona and Snapple in sales of bottled and canned teas, according to Beverage Digest, which tracks industry sales.

Coke and Nestle held a 10% share of the U.S. ready-to-drink tea market in 2006, which was down three points from 2005. That's compared with PepsiCo's 37% share and Arizona's 33% share.

Coke and its chief worldwide bottler, Coca-Cola Enterprises, got into a spat late last year when the bottler agreed to distribute some of Arizona's tea. CCE's executives said they could no longer afford to lag behind in the category.

The reworked BPW deal allows Coke and Nestle to compete independently in the U.S. ready-to-drink tea market.

In 2006, case sales -- a key beverage industry measurement -- of ready-to-drink tea grew nearly 26%.

Coke and Nestle already scaled down the BPW joint venture last November, pulling green teas out. That allowed Coke to buy juice and tea maker Fuze this year.

But Coke still wanted to develop its own so-called black or brown teas in the U.S. without having to share the profits or collaborate with another company.

Arizona, based in Lake Success, N.Y., was the creation of beer distributors John Ferolito and Don Vultaggio. They launched Arizona in 1992, naming it after one of the hottest states they could think of. The name was all marketing -- neither man had even visited the state.

The company's teas are known in part for their "tall-boy" cans and artsy package graphics.

Coke and Nestle have worked together for 15 years to produce and market canned and bottled teas, and most recently ready-to-drink coffees. In November, the companies announced they would go their separate ways when it comes to coffee and so-called red, white and green teas.

The newest agreement means the BPW joint venture will operate only outside of the U.S. Coke will continue marketing BPW's Nestea and Enviga sparkling green tea brands in the U.S. under a sublicense. Nestle will take over BPW's coffee "initiatives" by the end of 2008, according to Coke.

The revised agreement is expected to close by April 30 after a regulatory review.

From the April 9, 2007, Prepared Foods e-Flash