Coca-Cola to Buy UK Coffee Chain Costa for $5.1 Billion

Daniel Berehulak  Getty

NEW DELHI:Beverage giant Coca-Cola's global $5.1-billion buyout of Whitbread Plc-owned United Kingdom café chain Costa Coffee has set the world's biggest soda maker in direct competition with coffee giants such as Starbucks and Nestle, as it looks to hedge its risks in a sluggish soft drinks market and broaden its portfolio beyond sugary drinks.

The Coca-Cola acquisition of the company from Costa owner Whitbread, a multinational restaurant, hotel and hospitality company based in England, comes just four months after Whitbread signaled its intention to spin the Costa business off into its own entity.

The Costa deal opens a new business line for a company synonymous with fizzy, sugary beverages like Coca-Cola, Sprite, or Fanta, underscoring the pressure to find new areas of growth as consumer tastes change.

In a press release, Coca-Cola CEO James Quincey acknowledged the importance of Costa in supporting Coke's evolution into a "total beverage" company, as it gives the beverage giant a foothold in hot beverages, "one of the few segments of the total beverage landscape where Coca-Cola does not have a global brand". Costa is already the biggest coffee chain in the United Kingdom, and under Coca-Cola's reign, it could be set to get even bigger.

Costa Coffee has sought global expansion in recent years, particularly in China, as it looked to offset declining sales on British high streets.

As well as being the largest United Kingdom coffee chain, Costa is also the world's second largest.

The cola giant announced today that it has acquired global coffee brand Costa in a $5.1 billion deal.

McKevitt notes that Coke "doesn't now have any coffee outlets in its arsenal and this is an opportunity for the business to plug that gap and tap into this growing market".

Whitbread previously said in April it would split Costa off as a separate firm from Premier Inn.

George Lawrie, principal analyst at Forrester Research, said that Coke can use Costa stores to help sell its other products, including juice and water, directly to consumers, rather than through a grocery store or gas station. Any potential deal will depend on the valuation Costa Coffee offers to RJ Corp.

"Whitbread will also reduce debt and make a contribution to its pension fund, which will provide additional headroom for the expansion of Premier Inn".

Before Thursday's announcement, Whitbread had a market capitalisation of £7.3bn, with the company estimating that Costa represented £2.3bn of that value.

The deal is expected to complete in the first half of 2019. And another of JAB's coffee brands, Keurig, merged with Dr Pepper Snapple in January.

Italian coffee maker Illycaffe SpA has attracted interest from suitors including JAB and Nestle, but the family owners have so far rebuffed approaches, according to people familiar with the matter.

"It's also a category with many different elements, from vending to coffee shops to roast-and-ground to instant to pods and capsules".

Rothschild advised Coke on the deal.

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