A Costa Coffee store in London, UK. Coca-Cola Co. agreed to buy the U.K. chain Costa Coffee stepping into a battle with Nestle and Starbucks as it gains a global brand in hot drinks. Image Credit: Bloomberg

New York: Coca-Cola Co. is making an audacious move into coffee and retail outlets with the 3.9 billion pounds (Dh18.73 billion; $5.1 billion) purchase of UK coffee-shop leader Costa, its biggest acquisition in eight years that pushes the soda pioneer into a fiercely competitive java market.

The soft-drinks company swooped in after Whitbread Plc announced a plan in April to spin off the business. The transaction gives Coca-Cola instant heft in a business from which it was all but absent, with 3,800 stores in 32 countries and a foothold in China. Highlighting Coke’s desire to close the deal, Whitbread CEO Alison Brittain said the two sides signed just minutes before the announcement, after Coke first approached the other party in June.

“It’s been a very fast transaction,” Brittain said on a call with journalists and analysts.

And for Whitbread investors, it’s a deal they cheered on, with the shares soaring the most in almost two decades. A spin-off would have initially yielded smaller returns and might have taken as long as two years.

The Costa deal opens a new business line for a company synonymous with fizzy, sugary beverages like Coca-Cola, Sprite, or Fanta, underscoring the pressure to find new areas of growth as consumer tastes change. Arch-rival PepsiCo Inc. agreed this month to buy SodaStream Ltd., a maker of carbonated-water dispensers, for $3.2 billion. Coca-Cola Chief Executive Officer James Quincey said the Costa transaction is a “serious and significant investment” in hot beverages, a market that still remains largely fragmented.

Quincey touted the benefits of having a retail platform with Costa because it supports the brand and creates growth in so-called “immediate consumption” outlets that are stationed anywhere from supermarkets to airports. Costa would also be able to expand into ready-to-drink categories using Coke’s expertise and marketing heft, making the two businesses “remarkably complementary.”

Coke is under pressure to establish itself in new markets, with annual sales that have been in decline since 2012. Still, the Atlanta-based company is entering the coffee-shop market at a time when competitors such as Starbucks Corp. and JAB have already cornered many key locations.

Shares Leap

Whitbread shares rose as much as 19 per cent. It had said in April that it would spin off Costa as an independent publicly traded company, turning its focus to its Premier Inn hotel operations under pressure from activist investors.

The sale will yield a “substantial premium” to the value that would have been created through a spin-off, Whitbread said, adding it will return most of the proceeds to its shareholders.

Whitbread bought Costa in 1995, when it had 39 shops, for 19 million pounds. Since then, the market in the traditionally tea-drinking UK has boomed. The number of branded coffee outlets in the UK rose by 643 to 7,421 in 2017, according to market researcher Allegra Strategies Ltd.

Read more about the deal here

After missing out on the heady growth phase of coffee shops, Coca-Cola is entering when the market in countries like the UK and the US is crowded. Earlier this year, the British newspaper the Guardian ran a story titled “Have we reached peak Costa Coffee?”

Costa’s like-for-like sales in the UK dropped 2 per cent in the company’s first quarter as the retail market weakened. Consumers in the UK are reducing spending due to inflation and concern that Brexit may hurt the economy.

Still, Costa outranks Starbucks in the UK — it also operates a business of 8,000 self-service machines — and is expanding in markets such as China.

Acquisition Sprees

Costa was one of the few big coffee chains up for sale after Nestle SA and the Reimann family’s investment company JAB both went on acquisition sprees in the segment.

Nestle joined the trend of coffee giants taking aim at smaller niche producers, buying Blue Bottle Coffee and Chameleon Cold Brew. The Swiss food company also paid $7.2 billion to form an alliance with Starbucks that sells products in grocery stores.

JAB added the UK-based food-and-coffee chain Pret A Manger in a $2 billion deal earlier this year, following its past acquisitions of high-end coffee brands Peet’s and Stumptown. And in another union of the java and soft-drink worlds, JAB’s Keurig Green Mountain Inc. this year bought Dr Pepper Snapple Group for $18.7 billion.

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 has dabbled in coffee before, with an unsuccessful attempt at selling java-flavoured Coca-Cola Blak. Last year, it started selling Coca-Cola Coffee Plus in Japan and Australia, expanding it to Vietnam this year. The soft-drink giant also sells coffee under the Georgia brand in Japan and has some other local products for specific markets.

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

— Bloomberg