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Coca-Cola Makes Colossal Move with Costa Coffee Acquisition for $5.1 Billion

It was just in August that Pepsi-Co made a big announcement that it would be buying Israel’s Sodastream for $3.2 billion.

Now Coca-Cola came out swinging with its own big acquisition announcement and said it would be buying Costa Coffee for £3.9 billion, or $5.1 billion.

Costa has nearly 4,000 stores across 32 countries and according to Coca-Cola, will give the company “a strong coffee platform across parts of Europe, Asia Pacific, the Middle East and Africa, with the opportunity for additional expansion.”

Costa also has smaller on the go outlets named Costa Express, a roastery and for home coffee products.

Costa, which was acquired by Whitbread in 1995 when it only had 39 shops, has received a unanimous vote of yes and said it was to be in the best interests of shareholders.

Coca-Cola CEO James Quincey 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 to CNBC’s Sara Eisen in an interview.

“This is very consistent in our strategy, diversifying the total beverage portfolio. Clearly coffee is an area where we didn’t have a play.”

“There’s a lot of coffee stores in the U.S.,” he said. “There’s more room for growth in Europe and Asia.” He added that the company may open more stores in Asia, through franchise or partners.

“This is a coffee strategy, not a retail strategy or a food strategy,” Quincey explained.

Coca-Cola is aiming to use its distribution capability to expand Costa’s ready-to-drink coffee and expand the made-at-home drinks.

“A huge premium to that implied by the market: We valued Costa at £2.5bn in our 5280p SOTP based on a 10x 2019E EBITDA multiple,” said a team of Credit Suisse analysts led by Tim Ramskill.

“The disposal price of £3.8bn (after transaction costs) implies a 15.7x multiple. We estimate the current share price was discounting a multiple of 8.0x and therefore the deal adds £2.0bn of value or 1075p per share compared to the close price.”

“This is a bitter sweet moment for Whitbread investors,” said equity analyst Nicholas Hyett, at Hargreaves Lansdown.

“On the one hand £3.9 billion is an undeniably rich valuation and likely far better than Costa could achieve as an independently listed company, valuing its earnings higher than those of the mighty Starbucks,” he said.

“On the other, Costa has long been the jewel in Whitbread’s crown and some will be sad to see it go at any price, especially given the growth potential in China and elsewhere. It’s hard to see how things could have turned out differently given the price on offer though, and Coca-Cola are one of the few companies in the world that could justify the valuation.”

The deal still needs to get approval from shareholders and regulators, and is expected to close in the first half of 2019.

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