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Coca-Cola (KO) to Expand in Coffee Space With Costa Buyout

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The Coca-Cola Company (KO - Free Report) is not far behind in the race of beverage companies, spending huge sums on deals to battle the adversities that the soda industry in dealing with. After witnessing PepsiCo’s (PEP - Free Report) $3.2-billion deal to acquire the leading carbonated drink machine manufacturer SodaStream (SODA - Free Report) in late August, Coca-Cola plans to expand in the global coffee platform by acquiring the international coffee brand Costa for $5.1 billion.

The Deal

Coca-Cola has entered an agreement with Whitbread PLC, the parent of the London-based coffee chain — Costa, for £3.9 billion (nearly $5.1 billion). As part of the deal, Coca-Cola will acquire all outstanding shares of Costa from a wholly-owned subsidiary of Whitbread.

The acquisition offers Coca-Cola a strong coffee platform, with presence across Europe, the Asia Pacific, the Middle East and Africa, and the potential to expand further. Costa’s leading brand, about 4,000 retail outlets with highly trained baristas, a coffee-vending operation, for-home coffee formats and a state-of-the-art roaster fully complements Coca-Cola’s existing hot beverage portfolio, which currently lacks a global brand. Coca-Cola’s existing coffee portfolio mainly comprises the leading Georgia brand in Japan alongside other coffee products in many countries.

Costa will provide Coca-Cola with the expertise in coffee supply chain, including sourcing, vending and distribution. Further, Costa’s leading position in the United Kingdom and a fast-growing footprint in China are the added advantages. The company will also gain from the strong presence of Costa Express, a barista-quality coffee, offered in on-the-go locations like gas stations, movie theaters and travel hubs.

Expanding on the ready-to-drink coffee business has been on Coca-Cola’s strategy for quite a while, given the increasing demand for on-the-go coffee as Americans move away from purchasing the sugary sodas on the move.

Additionally, Costa’s expertise, on-the-go coffee formats and large brick-and-mortar presence, with significant growth potential in the burgeoning coffee segment, put Coca-Cola in direct competition with Starbucks Corp. (SBUX - Free Report) , which has over 27,000 cafes worldwide. While Starbucks is huge, it has a meager presence in China. On the other hand, Costa has nearly one-third of the market share in China. This gives Coca-Cola an edge in China, one of Costa’s target markets.

The transaction is currently conditioned upon the approval of Whitbread’s shareholders, which is likely to occur in mid-October. Additionally, other customary conditions, including antitrust approvals in the European Union and China, need to be satisfied. The deal is expected to be closed in the first half of 2019.

Coca-Cola expects the deal to be slightly accretive in the first year. Further, the deal is not expected to have any implication due to Coca-Cola’s fiscal 2018 guidance.

Notably, the deal announcement did not have a major impact on Coca-Cola’s shares. However, shares of this Zacks Rank #3 (Hold) company have increased 1.6% in the last six months against the industry’s 1.9% decrease.

 

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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