Coca-Cola buys British coffee chain Costa for $5.1 billion

Muriel Colon
September 2, 2018

With coffee and hot beverages being one of the few drinks markets that Coca-Cola has yet to enter, the soft drinks giant plans to increase Costa's share of the global coffee market.

In addition to its shops, Costa has self-serve coffee machines in grocery stores and gas stations.

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.

"Hot beverages is one of the few remaining segments of the total beverage landscape where Coca-Cola does not have a global brand", Quincey said.

Coca-Cola on Friday said it had agreed to buy global coffee chain Costa from its United Kingdom owner Whitbread for £3.9 billion ($5.1 billion). Costa's maroon shop front is now one of the most ubiquitous sights on British high streets, with 2,422 outlets in the United Kingdom and a further 1,399 in worldwide markets, operated as franchises, joint ventures and wholesale outlets.

Switzerland's Nestle, for example, has sealed a US$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. JAB, the Luxembourg-based holding company that owns brands like Krispy Kreme and Peet's Coffee, bought United Kingdom sandwich and coffee chain Pret A Manger in May.

Nicholas Hyett, an equity analyst at London-based stockbrokers Hargreaves Lansdown, said Costa will get "lots of care and attention" from Coca-Cola. In 2017, it generated operating income of $9.7 billion on revenues of $35.4 billion.

Whitbread bought Costa, which is now the UK's biggest coffee chain, for just £19m in 1995.

Premier Inn has 785 hotels in the United Kingdom and a sprinkling of others in Germany and the Middle East.

Whitbread will use a "significant majority" of the net cash proceeds around 3.8 billion pounds after taking into account such things as transaction costs returning cash to shareholders. According to the press statement, the transaction is expected to close in the first half of 2019. Some will be used to pay down debt and make a pension fund contribution.

Whitbread's share price soared 14 per cent. Coca-Cola shares were little changed.

"However, the growth story needs to be looked at because Whitbread has chose to change tack, shifting away from a demerger that it said would let the coffee and hotel chains grow more rapidly in favour of a quick sale".

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