Published: Fri, August 31, 2018
Money | By Ethel Goodwin

Coke into coffee: Coca-Cola buys United Kingdom coffee chain Costa for $7 billion

Coke into coffee: Coca-Cola buys United Kingdom coffee chain Costa for $7 billion

Whitbread bought Costa for 19 million pounds in 1995, when it had just 39 shops.

The deal, expected to close in the first half of 2019, comes on the heels of Coca-Cola's announcement earlier in August that it was buying a minority ownership stake in sports drink maker BodyArmor for an undisclosed amount.

Coca-Cola is to plug a gap in its portfolio with the acquisition of the Costa coffee brand from British firm Whitbread for 3.9 billion pounds ($5.1 billion) in cash.

Earlier in August, Coca-Cola's arch-rival PepsiCo struck a deal to buy Israeli company SodaStream for $3.2 billion - in a pitch to consumers concerned about mounting waste from soda cans and plastics in landfills worldwide. It now has more than 2,400 United Kingdom coffee shops, as well as some 1,400 outlets in 31 overseas markets. The Atlanta-based company is entering the coffee-shop market to make up for waning soft-drink demand, even as competitors such as Starbucks Corp. and JAB have already cornered many key locations.

While Coca-Cola does serve ready-made coffee from vending machines in Japan, it does not have a hot-drink category.

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 nearly 29,000 stores across 77 markets. She expects Coke to use the Costa name to create a range of ready-to-drink, cold-brew coffees.

Following pressure from activist shareholders, Whitbread revealed in April that it would spin off Costa, leaving it to concentrate on its hotel chain Premier Inn.

Nicholas Hyett, equity analyst at Hargreaves Lansdown, described the deal as "a bitter-sweet moment for Whitbread investors".

Then Coca-Cola got in touch with what Whitbread said was a "highly compelling" offer. "A significant majority" of the proceeds will be given to the shareholders, the firm added.

Whitbread shares rose as much as 19% as the sale gives the United Kingdom company a quick way out.

"However, the growth story needs to be looked at because Whitbread has made a decision 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".

It says the proceeds of the buyout will be used to reduce debt, boost its pension pot, as well as giving it cash to grow its Premier Inn hotel chain in the United Kingdom and Germany.

Coca-Cola shares were slightly down Friday in mid-morning trading.

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