Coca-Cola is buying Costa as the United Kingdom hits peak coffee

On Friday, the company announced that it has agreed to buy United Kingdom coffee chain Costa Coffee for $5.1 billion.

"However, the growth story needs to be looked at because Whitbread has chose to change tack, shifting away from a demerger that it said would let the coffee and hotel chains grow more rapidly in favour of a quick sale". Coca-Cola is urgently broadbasing its portfolio beyond its core sugary drinks to retain consumers switching to healthier drinks.

Coca-Cola's British chief executive James Quincey, 53, said the move was "not an acquisition where we're looking for places to save costs in the business", but "to grow the business and our participation in the category". "Coca-Cola's acquisition of Costa Coffee will heat up competition in the ready-to-drink coffee market, but JAB already has a strong footprint in retail coffee and remains a clear market leader by some margin". Earlier this month, PepsiCo agreed to pay $US3.2 billion for SodaStream, which makes carbonated-water dispensers. He cited potential opportunities to expand Costa's espresso machine system, Costa Express, which now has over 8,000 units in-market.

Costa has over 2,400 coffee shops in the United Kingdom and another 1,400 in more than 30 global markets.

"Over the last 20 years coffee has changed from a commodity into a lifestyle product as first of all consumers in western markets woke up to its appeal thanks to branded chains like Starbucks and Costa", said Jeffrey Young, the chief executive of coffee analysts Allegra Group.

Whitbread has struck a deal to sell the Costa Coffee chain to Coca-Cola for £3.9 billion.

In one motorway service station between York and Leeds in the north of England, there are no less than seven different outlets where one can buy Costa Coffee.

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

Shares of Whitbread jumped by 655p, or 16.3 per cent, to £46.75 after the surprise news that the 276-year-old company had torn up its plans to demerge Costa as a separately listed business and had agreed to sell the chain to Coca-Cola.

Before Thursday's announcement, Whitbread had a market capitalisation of £7.3bn, with the company estimating that Costa represented £2.3bn of that value.

Italian coffee maker Illycaffe SpA has attracted interest from suitors including JAB and Nestle, but the family owners have so far rebuffed approaches, according to people familiar with the matter. Coke had been working with Keurig on a since-scrapped cold version of the coffee brewer's single-serve machine. Costa isn't the first well-known brand it has let go - it has also previously owned companies like Marriott Hotels and TGI Fridays.

Bankers from Rothschild advised Coke, while Whitbread used Goldman Sachs, Morgan Stanley and Deutsche Bank.

  • Eleanor Harrison