Published: Sun, September 02, 2018
Markets | By Erika Turner

Costa Coffee to be sold to Coca-Cola in £3.9 billion deal

Costa Coffee to be sold to Coca-Cola in £3.9 billion deal

Operating a retail chain marks a new challenge for 132-year-old Atlanta-based Coca-Cola, which mostly sells soft drink concentrates to a network of franchised bottlers.

In February the supplier introduced the United Kingdom to low-calorie ice tea brand Fuze Tea, along with Honest Coffee, an extension of the Honest Tea range, and AdeZ, a range of dairy alternative smoothies.

The latest acquisition is a continuation of the diversity push. In 2006 there were 10,000 coffee shops in the United Kingdom; there are now 24,000, according to Allegra World Coffee Portal.

Outside of the retail cafes, Costa's true value may lie in its inherent synergies with Coke's existing businesses.

She said that Coca-Cola, which had $35.4bn in revenues in 2017 and has market capitalisation of over $191bn, has a global scale and supply chains that would enable Costa to grow and compete against worldwide rivals in a way that would not have been possible as a standalone company.

Coca-Cola is using the deal to expand into the coffee market, where it has no presence. Coke had been working with Keurig on a since-scrapped cold version of the coffee brewer's single-serve machine.

"In short, coffee is a big business with many formats". The spinoff would have taken as long as two years, the company had said. Coke's current RTD coffee portfolio in the US includes products from premium Italian roaster illy, cold brew coffee from Gold Peak, and a line of bottled iced coffees and frappes produced under partnership with the McDonald's McCafe brand. He explained: "Coffee is a significant on-trend profitable category and Costa is a strong scaleable coffee platform which can engage with consumers across multiple channels". DIL said it was too early to comment.

"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". It is now present on most British high streets, with 2,422 outlets across the country and a further 1,399 in global markets, operated as franchises, joint ventures and wholesale outlets. "For Coca-Cola, India is where they can get early advantage, because rest of Asia minus Australia has seen brutal domination by Starbucks".

Meanwhile, a roll-out of canned or bottled coffee drinks through Coke's bottling system could upset the dominance of a joint venture between Starbucks and PepsiCo. The out-of-home coffee market is not one to be underestimated. "I'm sure it would be nice for them to say, 'You can try all of our new Coke products there'".

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Coke's annual sales have been in decline since 2012.

Coca-Cola's move into coffee comes in the same week the government once again put fizzy drink makers in the spotlight over their role in the health of young people.

Richard Horwell, MD of Brand Relations, predicts this could cause friction with Starbucks, which now has a "strong relationship" with Coke. While the vast majority of Costa stores are in the UK, Coca-Cola did mention the company's recent retail growth in markets such as China.

However, not all potential rivals will be perturbed, believes Stanislas Duquesnoy, vice president - senior credit officer at Moody's. JAB, the Luxembourg-based holding company that owns brands like Krispy Kreme and Peet's Coffee, bought United Kingdom sandwich and coffee chain Pret A Manger in May.

GENEVA-Coca-Cola making an audacious move into coffee and retail outlets with the 3.9 billion-pound ($5.1 billion) purchase of United Kingdom chain Costa, its biggest acquisition in eight years that pushes the soda pioneer into the fiercely competitive java market.

Costa has not come cheap.

"We think the achieved multiple will be materially beyond the market's expectations", UBS concludes.

The U.S. beverage giant's CEO, James Quincey, first spoke to his counterpart at Costa's British parent company in May about adding coffee to the soda pioneer's lineup, according to people familiar with the matter.

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