Coca-Cola To Buy Costa Coffee Chain For $5.1B

by Ike Obudulu Posted on August 31st, 2018

As consumers shy away more and more from sugary soft drinks, Coca-Cola (KO.N) has set its sights on coffee with plans to buy Costa, the world’s second largest coffee chain, from Britain’s Whitbread for $5.1 billion (3.92 billion pounds) including debt.

“Coca-Cola has reached a definitive agreement to acquire Costa Limited, which is based in the United Kingdom and has operations across much of Europe, Africa, the Middle East and Asia Pacific. Subject to the satisfaction of customary closing conditions, we expect the transaction to close in the first half of 2019.” Coca-cola said today.

This will enable Coca-Cola to extend its push into healthier drinks and take on the likes of Starbucks and Nestle in the booming global coffee market.

Soda purveyors have sought for years to find new products as consumer tastes have changed: PepsiCo, for instance, has refocused on healthier snack offerings, and earlier this month agreed to buy SodaStream for $3.2 billion.

The deal puts Coke squarely into a red-hot battle in the coffee world, one that until now had been dominated by two food giants. One is Nestlé, which owns Nescafé and the high-end Blue Bottle chain. The other is JAB, the acquisitive European conglomerate that has snapped up Peet’s Coffee, Caribou Coffee, Stumptown and more.

Coke itself had flirted with buying a coffee company before, in a way. It invested $1.25 billion in the maker of Keurig home coffee makers, to help pave the way for a Keurig Kold line of at-home soda machines. But that partnership faltered two years later, after the Kold proved a bust. (Keurig is now owned by JAB, which combined the business with its Dr Pepper Snapple arm.)

Now Coke has joined the fray, by making one of its largest-ever acquisitions.

In its sights is the fast-rising consumption of coffee around the world, as well as the myriad ways that java can be served, from coffee shops to pods. The company is betting that its vast distribution network can help it muscle into the business, serving up at-home products as well as stores.

“Today, with the growth in coffee and hot beverages, it’s more important than ever that Coca-Cola make a serious and significant investment in the category, because it’s the right thing to do to serve our consumers with more of the drinks they want, which in turn helps our customers,” James Quincey, Coke’s chief executive, wrote in a corporate blog post.

The purchase from Britain’s Whitbread (WTB.L) of Costa’s almost 4,000 outlets thrusts the world’s biggest soda company into one of the few bright spots in the sluggish packaged food and drinks sector.

Paying about 1 billion pounds more than some analysts had expected, Coke will use its distribution network to supercharge Costa’s expansion as it chases current coffee chain market leader Starbucks (SBUX.O) and its almost 29,000 stores across 77 markets.

Beyond coffee shops, Coca-Cola CEO James Quincey, himself a Briton who is familiar with the Costa brand, said Costa would provide an important growth platform ranging from beans to bottled drinks in what is one of the world’s fastest-growing drink categories, growing 6 percent.

“Coca-Cola doesn’t have a broad, global portfolio in this growing category,” Quincey said, highlighting Costa’s retail footprint, roastery, supply chain and Costa Express vending system, which the company plans to expand.

But Coca-Cola will face a fight, as rivals are also bulking up in a fragmented market, keen to attract young people prepared to pay out for barista-made drinks and developing tastes for ever more exotic coffees.

Switzerland’s Nestle (NESN.S), for example, has sealed a $7 billion licensing deal for Starbucks’ retail business, while Europe’s billionaire Reimann clan has built an empire spanning coffee brands such as Kenco, Douwe Egberts and soft-drink maker Dr Pepper Snapple.

The purchase of the biggest coffee chain behind Starbucks adds to Coca-Cola’s drive to diversify away from fizzy drinks and expand its options for increasingly health-conscious consumers, after countries started introducing sugar taxes.

“So, Coca-Cola and Costa have remarkably complementary businesses. Costa offers Coca-Cola the best opportunities to create value in coffee. We can be better together.

This is not an acquisition where we’re looking for places to save costs in the business. We’re buying Costa to grow the business and our participation in the category.

It’s very important to me that we let Costa be Costa. We’ll operate Costa with our successful, connected-but-not-integrated model within Coca-Cola. Costa is a very different business for us, and we want current Costa employees – from executives in the UK to baristas in stores around the world – to be assured that we respect and value their expertise.

These are times of remarkably fast changes in our industry. I’m excited about Costa because it can help Coca-Cola become even better – together, Coca-Cola and Costa will take another great step as a total beverage company.” James Quincey, Coke’s chief executive wrote.

Whitbread shares leapt as much as 19 percent to a 2-1/2 year high of 48 pounds on news of the deal, which analysts said was priced at a punchy 16.4 times Costa’s latest annual earnings.

Whitbread had been in the process of demerging Costa from its hotel group Premier Inn, and the sale marks the latest transformation in a business that was established in 1742 as a brewer and which has also owned sports clubs and restaurants.

Whitbread acquired Costa in 1995 for 19 million pounds when it had only 39 shops. Costa’s maroon shop front is now one of the most ubiquitous sights on British high streets, with 2,422 outlets in the UK and a further 1,399 in international markets, operated as franchises, joint ventures and wholesale outlets.

It has recently expanded into China after growth in Britain became harder to find in a market bursting with chains such as Starbucks, Caffe Nero and thousands of independent outlets.

Whitbread said it would return cash to shareholders, cut debt and contribute to its pension fund with proceeds from the deal and further expand its hotel chain Premier Inn in Britain and Germany.

Asked if Whitbread had been pressured to accelerate the sale by activist investor Elliott and other hedge funds, Chief Executive Alison Britain said no.

“I would imagine they would be as delighted and surprised as anybody else this morning,” she told reporters.

“We were not interested in a sale other than to somebody who had a strategic rationale and therefore would be able to create significantly more value than Costa could create on its own.”

Rothschild advised Coke on the deal while Goldman Sachs, Morgan Stanley and Deutsche Bank advised Whitbread.

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