Coca-Cola buys coffee chain Costa for $5.1 billion

Virginia Carson
August 31, 2018

Whitbread acquired Costa in 1995 for £19m when it had 39 shops.

Coca-Cola hopes to close the deal in the first half of next year, subject to shareholder and regulatory approvals.

Geneva: Coca-Cola Co. agreed to buy the United Kingdom chain Costa Coffee for 3.9 billion pounds ($5.1 billion) to gain a global brand to expand in hot drinks.

The company said net cash proceeds from the transaction are expected to be around £3.8 billion (Rs 35,100 crore), after deducting estimated transaction costs and separation costs.

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Costa, which has more than 1,400 stores in more than 30 worldwide markets, gives Coca-Cola the ability to challenge Nestle (Swiss: NESN.VX - news) and Starbucks. It is second most popular in the Chinese market with over 400 coffee shops around the most populous country in the world.

Coca-Cola plans to use its existing infrastructure to expand Costa's business lines, which include retail outlets, vending machines and coffee for use at home.

Adding Costa to its array of brands will give Coca-Cola a presence in one of the few beverage markets it now doesn't contend in and could potentially provide stiff competition to the likes of Starbuck's. But it seems Coca-Cola swung in with an offer that was much more lucrative for Whitbread: the deal is worth £3.9 billion. The company will return most of the proceeds to its shareholders, it said.

"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".

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

Established in 1742 as a brewer, Whitbread had been in the process of demerging Costa from its Premier Inn hotel chain after it came under pressure from hedge funds. Some will be used to pay down debt and to make a contributing to the pension fund.

Hot beverages, he said, is one of "the few remaining segments of the total beverage landscape where Coca-Cola does not have a global brand".

Whitbread shares climbed more than 16 percent Friday on the London Stock Exchange.

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