Coca-Cola set to buy Costa Coffee for £3.9bn

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CostaCoca-Cola is set to buy high street coffee chain Costa for £3.9bn. The development follows the announcement from owner Whitbread’s earlier this year, that they were looking to offload the brand.

Costa, which was bought by Whitbread in 1995 for just £19m, has over 4,000 operations in many areas across the world as the owners hope the sale will reduce the company debt.

The move will also allow Whitbread to invest more money in expanding its hotel brand Premier Inn.

Meanwhile, through the purchase, Coca-Cola aims to expand beyond fizzy drinks as well as gain access Costa’s coffee platform across Europe, Asia Pacific, the Middle East and Africa.

Coca-Cola CEO James Quincey said: “Costa gives Coca-Cola new capabilities and expertise in coffee, and our system can create opportunities to grow the Costa brand worldwide.

“Hot beverages is one of the few segments of the total beverage landscape where Coca-Cola does not have a global brand. Costa gives us access to this market with a strong coffee platform.”

Analysis: Nicholas Hyett, Equity Analyst at Hargreaves Lansdown

This is a bitter sweet moment for Whitbread investors.

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, especially given the growth potential in China and elsewhere.

It’s hard to see how things could have turned out differently given the price on offer though, and Coca-Cola are one of the few companies in the world that could justify the valuation. 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 doesn’t have a killer brand. Costa will get lots of care and attention.

It’s worth bearing in mind exactly what Whitbread has achieved with the brand. Having bought Costa’s 39 stores for £19m in 1995, the sale price represents a compound annual growth rate of around 25%. Delivering that over a 24 year period is hugely impressive and represents incredible value creation for shareholders.

What remains of Whitbread, essentially just Premier Inn, will focus on expansion plans in the UK and Germany from here on. Progress has been good and we believe the product is excellent, but it’s a very different business to Costa and growth will be slower and demand more up-front investment. An excellent deal it may be, but Whitbread investors may miss the caffeine highs Costa serves up.

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