Coca-Cola is to buy the Costa Coffee chain from UK leisure group Whitbread in a £3.9bn deal that sets up the world’s biggest beverage maker to take on Starbucks, Nestlé and JAB Holdings in the global battle for coffee sales.
FTSE 100 group Whitbread had previously announced it would spin off Costa, the second largest coffee shop globally, under pressure from activist investors.
Shares in Whitbread jumped 18 per cent after it announced the deal on Friday. For Coca-Cola, the transaction represents a leap into the global coffee market, where it has little presence.
James Quincey, Coca-Cola president and chief executive, said Costa would give the company “new capabilities and expertise in coffee, and our system can create opportunities to grow the Costa brand worldwide”.
“Hot beverages is 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.”
Coffee has been one of the frothiest markets for mergers and acquisitions activity over the past year, as competition between Swiss group Nestlé and JAB Holdings — the private investment group that manages the wealth of Germany’s billionaire Reimann family — has heated up.
Nestlé’s deals include taking a majority stake in hipster roastery Blue Bottle and acquiring rights to sell Starbucks products, while JAB earlier this year struck a deal to combine Keurig Green Mountain coffee business with soft drinks producer Dr Pepper Snapple.
The deal values Costa at £3.9m including debt. A “significant majority” of the net cash proceeds of around £3.8bn will be returned to shareholders, with around £100m set aside for estimated transaction and separation costs.
The sale will allow it to focus on its faster-growing Premier Inn Hotel business. The move marks the end of Whitbread’s 23-year ownership of Costa, which the group bought for £19m when it had just 39 shops.
It now has more than 2,400 shops in the UK and 1,400 in more than 30 international markets, as well as operating a self-serve business.
Costa Coffee has sought international expansion in recent years, particularly in China, as it looked to offset declining sales on British high streets.
Under pressure from hedge funds Elliott Advisors and Sachem Head to take radical steps to counteract stalling growth, Whitbread announced its decision to spin off Costa in April, but publicly resisted the activist shareholders’ calls to begin a sale process.
Alison Brittain, chief executive of Whitbread, said the calculation changed after Coca-Cola made its first approach in June.
“We were not interested in a sale other than to someone who had a strategic rationale and so would increase the value [of the company],” she said.
She said that Coca-Cola, which had $35.4bn in revenues in 2017 and has market capitalisation of over $191bn, has a global scale and supply chains that would enable Costa to grow and compete against international rivals in a way that would not have been possible as a standalone company.
Before Thursday’s announcement, Whitbread had a market capitalisation of £7.3bn, with the company estimating that Costa represented £2.3bn of that value.
This suggests that Coca-Cola’s offer represents a premium of around 20 per cent on the coffee chain’s estimated value.
As well as returning proceeds to shareholders, the company said it intends to reduce debt and make a contribution to its pension fund — though did not provide precise details — in moves which it believes will allow it to continue its expansion of Premier Inn.
The deal is expected to close in the first half of 2019, subject to shareholder and regulatory approval.
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