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Coca-Cola to Acquire Costa Coffee: Consumer Staples ETFs in Focus

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On Aug 31, 2018, Coca-Cola (KO - Free Report) announced that a definitive agreement had been reached to buyout Costa Coffee for $5.1 billion. The company will buy all the issued and outstanding shares of Costa Limited, which is a wholly owned subsidiary of Whitbread.  Shareholder approval is pending on both sides as Whitbread will be seeking the same in mid-October. The deal is subject to customary closing conditions with anti-trust approvals in the European Union and China. The deal is supposed to be completed by the first half of 2019 (see all Consumer Staples ETFs).
 
Whitbread is U.K.’s largest hospitality company. In recent times, it was facing pressure from investors to focus more on the core operation of hospitality, Premier Inn, which has consistently been rated the best hotel value chain by YouGOV. The CEO of Whitbread, was seen saying that the company have received substantial premium on the sale of its wholly owned subsidiary as the valuation for Costa as a demerged entity was $3.85 billion. 
 
Costa Coffee offers barista-quality coffees on the move through its own Costa Express, installed in heavy footfall locations like gas stations, movie theatres and travel hubs. Costa generated revenues and EBITDA of $1.7 billion and $312 million, respectively, for the fiscal year ended Mar 1, 2018.
 
The chief executive of Coca-Cola has been trying to make the brand a total beverage company because none of the 500 soft drink brands under the name of Coca-Cola come close to coke when it comes to market penetration and revenues. Small growth in the coke number brings enormous dollar impact.
 
"Hot beverages are one of the few segments of the total beverage landscape where Coca-Cola does not have a global brand," per Whitbread management. Costa Coffee is the favorite and largest coffee chain in the U.K. The brand has nearly 4000 retail outlets in more than 30 countries. Costa also provides vending operations for coffee making at home and has Europe’s biggest coffee roastery which was opened on Mar 13, 2017, enabling it to produce 2 billion hot cups in a year. This clearly indicates why Costa’s acquisition could be beneficial for Coca-Cola (see: Wal-Mart Blockbuster Q2 Earnings Pushes Consumer ETFs Higher).
 
Investors should note that Atlanta based Coca-Cola will face serious competition from giants-Starbucks (SBUX - Free Report) , Nestlé (NSRGY - Free Report) and JAB Holdings.  Lately, there has been a surge in deals in the coffee industry.  In the beginning of the year, Nestle and Starbucks came together in a $7.2 billion deal to form a global coffee alliance per which the former sell and distribute the products of Starbucks worldwide. JAB Holdings, the Luxembourg-based company, purchased U.K.’s sandwich and organic coffee chain Prêt A Manager for $2 billion in late May (read:  Pepsico to Acquire SodaStream: Consumer Staples ETFs in Focus).
 
Still, Coca-Cola should benefit from this acquisition as Starbucks’ business in China could be heavily affected with close to 3000 stores. The point of saturation has come upon the brand with stores in almost all neighborhood corners. Costa Coffee already has a decent presence in the China market with 450 stores and will only expand after Coca-Cola enters the scene.
 
Market Impact
 
There was no major price movement in shares of Coca-Cola on Aug 31 as it experienced a 0.85% fall. However, a 14.3% jump in the share price of parent company Whitbread was seen on Friday in London.
 
With Coca-Cola entering the thriving market space of coffee in a big way, the following ETFs with Coca-Cola as a major holding will definitely be on investors’ radar:
 
Consumer Staples Select Sector SPDR Fund (XLP - Free Report)
 
It tracks the Consumer Staples Select Sector Index. Coca-Cola sits is in the second spot out of 32 holdings with a weight of 10.37%. AUM is $9.37 billion and the expense ratio is 0.13%. It has a Zacks ETF Rank #5 (Strong Sell) and a Medium risk outlook.
 
Fidelity MSCI Consumer Staples Index ETF (FSTA - Free Report)
 
It tracks the MSCI USA IMI Consumer Staples Index. There are 89 holdings in the basket with the second spot occupied by Coca-Cola (9.96%). AUM is $325.3 million and the expense ratio is a meager 0.08%. It has a Zacks ETF Rank #5 and a Medium risk outlook.
 
Vanguard Consumer Staples ETF (VDC - Free Report)
 
It tracks the MSCI US Investable Market Consumer Staples 25/50 Index. There are 93 holdings in the pool of fund and Coca-Cola again occupies the second spot with 9.6% weight.  AUM is $4 billion and the expense ratio is 0.10%. It has a Zacks ETF Rank #5 and a Medium risk outlook.
 
iShares Evolved U.S. Consumer Staples ETF (IECS - Free Report)
 
It is an actively managed fund. Coca-Cola tops the holdings table weighing 9.56%. AUM is $3.8 million and the expense ratio is 0.18%
 
iShares U.S. Consumer Goods ETF (IYK - Free Report)
 
This fund tracks the Dow Jones U.S. Consumer Goods Index. Coca-Cola holds the second spot among the 107 holdings in the basket with weight of 8.05%. AUM is $529.3 million and the expense ratio is 0.43%. It has a Zacks ETF Rank #4 (Sell) and a Medium risk outlook.
 
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