One of the world’s largest coffee chain, Costa is now under the beverage giant, Coca-cola, for £3.9B. Owner Whitbread deliberated on developing the chain as a separate firm but concluded that selling Costa would be more profitable.
According to Chief executive, Alison Brittain, Whitbread will now prioritize its Premier Inn businesses in UK and Germany. In 1995, Whitbread bought Costa for £19m when it had only 39 outlets. Today, the chain has more than 2,400 shops in the UK, 1,400 outlets in 31 countries, and 8,237 vending machines around the world.
Brittain told BBC that Coca-Cola intended to purchase the chain because “they want the coffee product, they have no coffee in their range.”
Whitbread will use the money for the expansion of Premier Inn, to return the cash of shareholders, to pay debts and to increase the company’s pension fund.
Chief executive Brittain added that Coca-Cola’s offer is significantly higher than demerging Costa into a separate firm in the stock market. She said it was a “win-win” deal for both parties.
The chief executive thought Coca-Cola plans to use Costa to make “ready to drink, cold brew coffees.”
“You could see Costa absolutely everywhere, in vending machines, hotels, restaurants, pubs, cafes – in all the places you see Coke today,” Brittain added.
James Quincey, Coca-Cola’s chief executive, believed that Costa was “a winning company that can go global.” On a conference call, Quincey admitted in front of investors that retail was a new field for the beverage giant. However, he knows that Costa already had “a strong management team.” For that, Coca-Cola plans to “make it attractive for them to stay.”
Earlier this year, Whitbread announced its plan to spin-off Costa. After being under pressure when US hedge fund, Elliott Advisors, held the largest share for Costa, Whitbread considered breaking up the business. Elliott Advisors brought up a demerger plan after it built a 6% stake in the firm.
Costa is the second to the largest coffee chain in the world, and the biggest in the UK. In China, Costa is the third leading chain when it comes to the most number of stores next to Starbucks. Consumer analysts, Kantar Worldpanel, said Costa obtains about £6.3B annual income just in the UK.
Apart from Premier Inn, Whitbread also owns Brewers Fayre and Beefeater restaurants. The company used to hold famous brands such as Pizza Hut, TGI Fridays, and Marriott Hotels.
The deal is expected to be complete by the first half of 2019 after the finalization of agreement among Whitbread’s shareholders and other approvals like anti-trust regulators.
For years, Whitbread never liked the idea of demerging. The company glorifies the benefits of having two leisure brands in one place when asked about the reason behind having a hotel chain and a coffee chain.
Although the benefits don’t entirely convince some shareholders, they ride along Whitbread’s plan as they see the company grow its revenue, profits, as well as their share price at a steady pace for more than ten years.
However, things changed when Alison Brittain became the chief executive, and Elliott Management registered as a shareholder of the company. The aggressive US hedge fund had a history of shaking big companies, and Brittain believed that Costa and Premier are strong enough to stand on its own.
The initial plan was to spin-off Costa in the next two years, but Coca-Cola threw an irresistible offer. The deal was a milestone for Whitbread, and for Coca-Cola, it could also be a significant turning point. For the first time, the company will handle hot beverages, and it could also initiate growth, which investors are waiting for in a long time.
An equity analyst at Hargreaves Lansdown, Nicholas Hyett, told BBC that the deal is “a bitter-sweet moment for Whitbread investors.”
“On the one hand, £3.9bn 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,” Lansdown added.
“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.”
Watch this video that covers the acquisition :