SUMMARY:
Coca Cola had recently acquired the second largest Coffee Chain Costa Coffee for £3.9bn. It is also planning to produce a drink using cannabis extract.
TARGET:
Costa Coffee was founded in the UK in 1971 by two Italian brothers, Sergio and Bruno Costa. In 1995 the company was acquired by Whitbread for £23m at that time it counted 41 shops in the UK. Then in 1999 it went international opening a shop in Dubai. Just 10 years later Costa opened its thousand shop and acquired Coffee Heaven for 36m for further expand internationally. In 2017 Costa counted 6000 automatic coffee distributors (grew to more than 8000 in 2018) and 3400 shops of which a third outside the UK. Interestingly in the Dubai shops coffee are brought to consumers by drones within 15 min time.
At the beginning of 2018 the American fund Elliott bought 6 % of the shares with the intention to spin off part of the company and to list it. In August 31th Coca Cola acquired 100% of the shares for £3.9bn 16 times the Ebitda. The company at 31 March 2018 made £1.3bn annual revenues.
The British coffee chain only makes 12% of its revenues outside the UK despite plans to expand its actual 400 shops in China. Could Coca Cola make it more international?
SELLER:
Whitbread is a British Hotel Company with over 750 hotels, Public limited listed on the LSE, FTSE 100, and with revenues increasing in the last 5 years to £3.3bn in 2018. The share price on the deal date grew from 40,20 to 45,96 a 14.3% increase. Under pression from Elliott, who asked to list Costa as independent entity, they said selling was the easiest thing to do. They will now focus on Hotel business.
BUYER:
The revenues of Coca Cola are slightly decreasing in the last 3 years to US$ 35bn revenues in 2017. Coca Cola has a long history of acquisitions. It has bought and plan to buy many drinks manufacturers. The company has been in a steady, acquiring mode over the last few years. It has acquired rivals specializing in vitamin water, coconut water and tea, but now it’s buying a tiny regional soda company and a major retail coffee chain overseas. What’s driving these purchases? What’s driving these acquisitions has been America’s gradual decline of drinking sugar-filled beverages. It is now targeting Asian Market.
Government Tax on sugars drink does not apply to “Coca Cola Diet” or “Coca Cola Zero”.
COFFEE MARKET:
Coffee is the highest consumed beverage in developed countries. The global market value of coffee is expected to witness a 5.5% CAGR. The ready-to-drink coffee demand is rising. The falling popularity of soft drinks, including the caffeinated colas, are the driving sales of RTD coffee. Europe accounts for 40% and North America for 35%. The worldwide Market size of Ready To Drink (RTD) coffee is estimated to be £7.36bn.
THE DEAL:
The advisers of The Coca Cola company were Rothschild which acted as exclusive financial adviser. Clifford Chance acted as legal counsel, and Skadden, Arps, Slate, Meagher & Flom acted as tax counsel. Whitbread used Goldman Sachs, Morgan Stanley and Deutsche Bank AG.
Costa share value grew intraday 14.3% meanwhile Coca Cola share value lost 1.32% but fully recovered the following week. The deal will be certified by the competition commission by 2019.
In terms of Synergies Coca Cola with its size and international presence could make Costa brand to soar especially outside its domestic market which is the UK.
STRATEGY:
Coca Cola has a large portfolio of soft drinks and has been suffered the unhealthy sugar rich drinks image these past years . Coffee ready to drink has grown with a CAGR of 5.5% and makes a sizeable market today. The British Costa ranks in size between the US American Starbucks and the Italian Lavazza. Which make a nice target.
OPEN CONCLUSION:
We are witnessing a large interest in the coffee rtd market. Think about the Nespresso brand and its home coffee makers. Starbucks opening its first shop in the virgin territory of Italy. Nestle, the world’s largest food and beverage company, to pay Starbucks Corp $7.15 billion in cash for exclusive rights to sell. Now Coca Cola buying Costa Coffee the second largest player.
Maybe after the issue of the alcohol tax and the sugar tax we will see a coffee tax?