Coca Cola buys Costa coffee in a $5.1 billion deal

Coca-Cola has agreed to buy coffee chain Costa coffee for $5.1 billion including debt to extend its push into healthier drinks and take on the likes of Starbucks and Nestle in the booming global coffee market.

The purchase from Britain’s Whitbread of Costa’s almost 4,000 outlets thrusts the world’s biggest soda company into one of the few bright spots in the sluggish packaged food and drinks sector.

Paying about 1 billion pounds ($1.3 billion) 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 and its almost 29,000 stores across 77 markets.

Beyond coffee shops, Coca-Cola CEO James Quincey, himself a Briton who is familiar with the Costa brand, 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, highlighting Costa’s retail footprint, roastery, supply chain and Costa Express vending system, which the company plans to expand.

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

Quincey’s coffee strategy is focused on global expansion, primarily in Europe and Asia.

“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,” he said.

But Coca-Cola will face a fight, as rivals are also bulking up in a fragmented market, keen to attract young people prepared to pay out for barista-made drinks and developing tastes for ever more exotic coffees.

Switzerland’s Nestle, for example, has sealed a $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.

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.

Whitbread shares leapt as much as 19 percent to a 2-1/2 year high of 48 pounds on news of the deal, which analysts said was priced at a punchy 16.4 times Costa’s latest annual earnings.

“Coca-Cola are one of the few companies in the world that could justify the valuation,” said Nicholas Hyett, equity analyst at Hargreaves Lansdown.

“Its global reach should turbo-charge growth in the years to come, and hot drinks are one of the few areas of the wider beverages sector where the soft drinks giant doesnt have a killer brand. Costa will get lots of care and attention.”

Whitbread had been in the process of demerging Costa from its hotel group Premier Inn, and the sale marks the latest transformation in a business that was established in 1742 as a brewer and which has also owned sports clubs and restaurants.

Whitbread acquired Costa in 1995 for 19 million pounds when it had only 39 shops. Costa’s maroon shop front is now one of the most ubiquitous sights on British high streets, with 2,422 outlets in the UK and a further 1,399 in international markets, operated as franchises, joint ventures and wholesale outlets.

It has recently expanded into China after growth in Britain became harder to find in a market bursting with chains such as Starbucks, Caffe Nero and thousands of independent outlets.

“(This is) certainly a big coup for Whitbread that they managed to sell Costa at a valuation much above what anyone would have expected,” Bernstein analyst Richard Clarke said.

Whitbread said it would return cash to shareholders, cut debt and contribute to its pension fund with proceeds from the deal and further expand its hotel chain Premier Inn in Britain and Germany.

Asked if Whitbread had been pressured to accelerate the sale by activist investor Elliott and other hedge funds, Chief Executive Alison Britain said no.

“I would imagine they would be as delighted and surprised as anybody else this morning,” she told reporters.

“We were not interested in a sale other than to somebody who had a strategic rationale and therefore would be able to create significantly more value than Costa could create on its own.”

Rothschild advised Coke on the deal while Goldman Sachs, Morgan Stanley and Deutsche Bank advised Whitbread.

CNBC