Coca-Cola Acquires Costa Coffee Chain For £3.90 billion

Coca-Cola Acquires Costa Coffee Chain For £3.90 billion
September 3, 2018

 

Coca-Cola Co. has agreed to buy the Costa Coffee chain from UK leisure group Whitbread in a £3.9bn (~$5.1 billion) deal. The courageous acquisition puts the world’s biggest beverage maker in direct competition with Starbucks, Nestlé and JAB Holdings in the global coffee market. Notably, it is the most significant acquisition of Coca-Cola in eight years.

 

Sold for 16x the earnings

The price at which Whitbread Plc. sold Costa is at least 16 times the earnings of the firm before interest, taxes, depreciation, and amortization. Whitbread announced its interest to divest Costa in April, following pressure from an activist investor who wanted the company to segregate its coffee business from core hotel (Premier Inn) operations. Initially, Whitbread had plans to spin off the chain as a separate firm but completed a straight sale as it is more profitable. Analysts have pointed out that a spinoff would have resulted in smaller yields and might have taken about two years to generate similar returns

As consumers are shying away from sugary sodas, makers of soft drinks are looking at other alternatives. Earlier this month, SodaStream Ltd, which manufactures carbonated-water dispensers, was bought out by PepsiCo Inc for $3.20 billion.  After buying Blue Bottle Coffee and Chameleon Cold Brew, Nestle SA paid $7.2 billion to strike an alliance with Starbucks to sell the latter’s products in grocery stores.

Similarly, JAB, Reimann family’s investment company acquired the U.K.-based food-and-coffee chain Pret A Manger for $2 billion earlier this year. Previously, JAB had purchased high-end coffee brands such as Peet’s and Stumptown.

JAB’s Keurig Green Mountain Inc. also acquired Dr. Pepper Snapple Group for $18.7 billion, earlier this year. As a result, Costa was the only suitable coffee chain that was available for takeover in the market.

Whitbread CEO Alison Brittain revealed that executives on both sides signed the papers just minutes before the announcement. Brittain also pointed out that Coke had first approached them in June. While speaking to analysts and journalists, Brittain said: “It’s been a very fast transaction.”

For £19 million, Whitbread acquired Costa in 1995, when the latter had only 39 shops. Fortunately, from then on, the coffee market began to proliferate in the traditionally tea-drinking U.K. From 643, the number of branded coffee outlets in the U.K. increased to 7,421 in 2017, said market research firm Allegra Strategies Ltd.

Whitbread acknowledges the ‘substantial premium’ it will receive from the divestment of Costa and plans to return a significant portion of the proceeds to its shareholders. While Rothschild acted as advisors to Coke, Whitbread was guided by Goldman Sachs, Deutsche Bank AG, and Morgan Stanley.

 

Coca-Cola now a retail brand owner

The acquisition provides a solid entry for Coca-Cola in a business in which it has been mostly absent. Presently Costa operates 3,800 stores in 32 countries, including China. Following the acquisition, Coca-Cola becomes a retail brand owner for the first time. The beverage maker is under tremendous pressure to expand and establish itself in new markets as annual sales have been on a decline since 2012.

In the UK, during the first-quarter, Costa’s like-for-like sales declined 2% due to overall weakness in the retail market. The U.K. consumers are tightening their purse strings due to a rise in inflation and concerns over the impact of Brexit on the economy.

Despite the decline, Costa still pips Starbucks in the UK. The coffee chain expands in China and also operates 8,000 vending machines.

Commenting on the acquisition, Coca-Cola CEO James Quincey said: “Hot beverages are one of the few remaining segments of the total beverage landscape where Coca-Cola does not have a global brand. Costa gives us access to this market through a strong coffee platform.”

Whitbread investors were thrilled with the news, with the stock rallying by about 15% to close at 4,607.28p on Friday. Coke, which closed at $44.57 on Friday, is expected to react positively in the days ahead.

Technically, the historical price chart of Coke indicates that the stock is trading above its 50-day moving average. Furthermore, the MACD indicator is ascending in the positive zone. Therefore, a rally in the Coke’s stock price is expected in the week ahead.

Coca-Cola - Technical Analysis - 3rd September 2018

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Janine

Janine

Janine is our editor for related stock market news. Andrew and Janine will be focusing on providing the latest trends and where the next hit could be


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