Here’s Why Coca-Cola Is Buying Costa Coffee for $5.1 Billion

The Coca-Cola Company is buying U.K.-based Costa Limited, a global coffee chain with almost 4,000 retail outlets, for $5.1 billion, it announced today.

While Costa does not compete in the U.S. market, it is the U.K.’s leading coffee chain and operates several hundred outlets in China. Its parent company, Whitbread, also operates the Premier Inn hotel chain. American hedge fund Elliott Management took a roughly 10% stake and argued for splitting the business, the BBC reports. As of April, Whitbread was planning to slowly spin off Costa. Then Coca-Cola came along.

Coca-Cola’s earnings have declined over the last five years from almost $14 billion (EBITDA) in 2013 to just under $9 billion in 2017, but it still dwarfs Costa, which generated $312 million in EBITDA in its last fiscal year. The decline parallels a longer decline in soft drink consumption in the U.S. The soft drink giant is redefining its portfolio to include less sugary and more profitable drinks including water, alcohol, and now hot drinks.

While Coca-Cola does serve ready-made coffee from vending machines in Japan, it does not have a hot-drink category. The coffee industry is growing at a 6% annual clip, wrote Coca-Cola president and CEO James Quincey, and “it’s more important than ever that Coca-Cola make a serious and significant investment in the category, because it’s the right thing to do to serve our consumers with more of the drinks they want.”

Quincey added that Costa offered an attractive global supply chain, taking coffee beans from roasting through to customers in multiple formats. He said: “Costa is a platform with a great supply chain in coffee, a world-class roastery, a strong retail presence and a vending system. Costa has strengths in many countries and in many key distribution channels of the coffee business.”

“On the one hand, £3.9 billion is an undeniably rich valuation and likely far better than Costa could achieve as an independently listed company, valuing its earnings higher than those of the mighty Starbucks. On the other, Costa has long been the jewel in Whitbread’s crown and some will be sad to see it go at any price,” equity analyst Nicholas Hyett of Hargreaves Lansdown told the BBC.

The deal is subject to stockholder and antitrust regulatory approvals, and Coca-Cola expects it to close in mid-2019. The company said its long-term targets remain unchanged but that it would provide updated guidance in its next quarterly earnings call. Today it is hosting a call to discuss the deal at 8:30 Eastern Time.

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