Coca-Cola goes for a coffee

November 2018 | DEALFRONT | MERGERS & ACQUISITIONS

Financier Worldwide Magazine

November 2018 Issue

Whitbread Plc has agreed to sell Costa Limited to The Coca-Cola Company in a deal worth $5.1bn. The companies expect the deal to close in the first half of 2019, pending shareholder and regulatory approval.

The deal, which represents Coca-Cola’s biggest acquisition for eight years, is the company’s latest effort to diversify away from the fizzy beverages which still account for almost three-quarters of its annual sales. And with sales falling due to the ongoing global pushback against sugar-laden soft drinks, the pressure on Coca-Cola to diversify has intensified.

By acquiring Costa, Coca-Cola will be gaining a foothold in the fast-growing coffee market, a sector it has largely watched from the sidelines to date. Though Coca-Cola does sell some coffee in Japan, it is on a small-scale. The coffee industry is worth $165bn globally, a fraction of the $513bn soft drink market, but it is expanding, and Costa and rival Starbucks are at the forefront of that growth.

Costa, which had 39 stores when it was acquired by Whitbread in 1995, has recently expanded into Asia as the UK approaches saturation point. Costa has 2422 outlets in the UK, nearly twice as many as Starbucks, and a further 1399 in international markets. Costa’s small foothold in the Chinese coffee market could prove fruitful for Coca-Cola in the long-term. Though the hot beverage market there is still in its infancy, the potential for growth is significant. Globally, demand for coffee is growing at around 6 percent per year, however in China the growth rate of coffee consumption may be significantly higher in the coming years due to middle class expansion and improving living standards.

Coca-Cola will utilise its distribution network to help Costa grow as it continues to chase Starbucks, the dominant global coffee-chain leader with 29,000 locations across 77 markets. Costa, by contrast, has 4000 brick-and-mortar stores globally and around 8000 self-service machines across the UK. Costa also has an attractive pod business, something which Coca-Cola is not currently able to offer. Starbucks, by contrast, has a lucrative licensing deal with Nestle which allows the company to put its beverages in supermarkets.

“Costa gives Coca-Cola new capabilities and expertise in coffee, and our system can create opportunities to grow the Costa brand worldwide,” said James Quincey, Coca-Cola president and chief executive. “Hot beverages is one of the few remaining segments of the total beverage landscape where Coca-Cola does not have a global brand. Costa gives us access to this market through a strong coffee platform. I’d like to welcome the team to Coca-Cola and look forward to working with them.”

“The Costa team and I are extremely excited to be joining The Coca-Cola Company,” said Dominic Paul, Costa’s managing director. “Costa is a fantastic business with committed and passionate associates, a great track record and enormous global potential. Being part of the Coca-Cola system will enable us to grow the business farther and faster. I would like to say a huge thank you to our customers and to everyone in the Costa team who have helped us build the business to this position, and I look forward to the next exciting chapter in Costa’s vision of Inspiring the World to Love Great Coffee.”

Whitbread announced its intent to spin off the Costa business in April and Coca-Cola made an unsolicited move for the company in June. The sale will yield a “significant premium” to the value that would have been created through a spinoff, Whitbread said. The company will return most of the proceeds of the sale to its shareholders, though it will also commit some of the cash to reducing its pension deficit.

Richard Summerfield