Whitbread stuns the City with sale of Costa Coffee to Coca-cola for £3.9bn
Investors raise hope of an even bigger bid to gazump American giant as British firm welcomes ‘firepower’ for Premier Inn’s growth in Germany
HOPES have been raised that a rival bidder could gatecrash Whitbread’s “stonking” £3.9bn sale of coffee giant Costa to Coca-cola.
The 276-year-old British company surprised the City with a sale that smashed expectations.
Whitbread earmarked Costa for a multibillion-pound demerger earlier this year following pressure from hedge-fund investors. The sale values the business at roughly £1bn more than analysts had calculated it would be worth had the demerger gone through.
Alison Brittain, the chief executive, described the deal as “absolutely stonking” and told The Daily Telegraph: “[It’s] bloody brilliant; I am very pleased.”
Ms Brittain had downplayed selling the business instead of spinning it off, but insisted Whitbread was open to selling Costa to a “strategic buyer”, rather than a financial player such as a private equity firm that may not deliver additional value to shareholders.
“Coke had a big gap in their repertoire,” said Ms Brittain. “They’ve got no coffee products … they looked around the world and saw Costa and thought ‘that is the company for us’.”
Shares in the FTSE 100 company closed up 14.3pc at £45.96 after the hastily agreed deal. Talks with Cocacola began in June, Ms Brittain said, with the deal signed just minutes before a 7am announcement. There will be a break of about six weeks before the sale is put to the shareholder vote.
The speed of the deal, and the prospect of a short hiatus, prompted speculation that a rival with deep pockets could gazump Coke. One Whitbread investor said Restaurant Brands International, the Canadian owner of Burger King, could be interested given its plans to develop another of its brands, popular fast-food outlet Tim Hortons, in the UK.
However, another of Whitbread’s largest investors was less confident: “The likelihood here is that they ran a full auction process and Coke was the eventual clearing bidder. But if someone else is willing to come in over the top then of course I think that would be welcomed by shareholders.”
Moving Costa into Coca-cola’s hands is expected to take between 12 and 24 months, Whitbread said, with a “significant majority” of the proceeds returned to shareholders.
Sources familiar with the situation said investors could be in line to receive about £2.9bn. Some £350m of the gross proceeds would used to plug the company’s pension deficit with £500m allocated to pay down short-term debt.
Briton James Quincey, the Coca-cola boss, said the deal would give his company a strong foothold in the coffee market with “one of the few remaining segments of the total beverage landscape where Coca-cola does not have a global brand”.
Scott Ferguson, the managing director of Sachem Head, a hedge-fund investor that championed Costa’s spinoff, praised Whitbread’s management for “thoughtfully maximising value for shareholders”.
The sale will leave Whitbread holding its Premier Inn hotels, as well as the Beefeater and Brewers Fayre restaurants. Ms Brittain said the Costa sale will provide “more firepower to accelerate our growth [of Premier Inn] into Germany”.
Nigel Parson, an analyst at Canacord Genuity, said it could lead to Whitbread’s demise: “Premier Inn should not exist as a standalone company, in our view, and should be swallowed up by the likes of IHG, Marriott or Accor operating in concert with a property investor to split the property from operations – one slip and it could be gone.”
Nicholas Hyett, at Hargreaves Lansdown, said it was likely to be a “bittersweet moment” for investors. While £3.9bn “is an undeniably rich valuation”, Costa has “long been the jewel in Whitbread’s crown and some will be sad to see it go at any price”.
Whenever Alison Brittain, the chief executive of Whitbread, was asked whether she’d consider selling Costa instead of spinning it off, she’d ask a question of her own: “Who’d buy it?”
It was a fair question. There’s surely only so much coffee the highly caffeinated British public can possibly soak up. In 2006 there were 10,000 coffee shops in the UK; there are now 24,000, according to Allegra World Coffee Portal. Citigroup has predicted that there are only a couple of years of structural growth in the market after which no net new shops will open. And Costa is already the biggest player with twice as many branches in the UK as Starbucks and almost four times as many as Caffè Nero.
We may be hitting peak coffee at the same time as the British high street is in decline. Coffee shops are not immune from lower footfalls, business rates and the supply of cheap labour from Europe drying up. Three fifths of Costa’s UK stores are in shopping centres or out-of-town retail parks, according to Allegra; its sales fell 2pc in the first three months of this year.
But it turns out that there is a company that is big enough, ugly enough and (because of the war on sugar) perhaps desperate enough to want to gain exposure to the UK high street right now. Coke is it.
Of course Coca-cola is not just buying a load of UK coffee shops. It is, according to its own press release, buying “a scalable coffee platform with critical know-how and expertise in a fast-growing, on-trend category”. Reading past the corporate gobbledegook it seems that Coke’s British boss James Quincey believes Costa is well on its way to diversifying away from the UK high street. At the last count, Costa had more than 8,000 vending machines in petrol stations and other non-high street locations. Until now this has been billed as one of the company’s biggest growth drivers. But it slightly pales into insignificance when you realise that Coke has 10 million vending machines around the world. Talk about step change.
Costa has already started ramping up internationally, especially in China where it bought out its joint venture partner last year, and is now present in 31 countries. The global coffee market is still expanding at about 6pc a year, according to Coca-cola, making it one of the fastest-growing beverage categories and a notable hole in Coke’s offering.
In May, Nestlé struck a licensing deal with Starbucks that will result in the world’s largest food-and-drink company selling Starbucks-branded coffee in a host of formats. Coca-cola will try to use its huge distribution capability to ensure that, before long, you will soon be able to pick up a can of Costa iced coffee in Ulan Bator.
The deal also answers questions about whether those activist investors at Elliott Advisors and Sachem Head Capital Management, who had built up big stakes in Whitbread, know what they are talking about. They said there was value to be unlocked by separating the coffee side of the business from its hotels and restaurants. They were right. The shares jumped by nearly a fifth after the deal was announced.
The sale is undoubtedly a coup for Brittain. Whitbread paid just £19m for 39 coffee stores in 1995. The sale price of £3.9bn represents an annual growth rate of about 25pc over nearly a quarter of a century. The deal values Costa at 16.4 times earnings before interest, tax, depreciation and amortisation. Starbucks trades at only 14.4 times last year’s Ebitda.
When Whitbread has paid off its bankers, it will be left with £3.8bn cash. Most will be returned to shareholders. Some will be used to pay down debts and plug the pension scheme. What will it do with the rest?
Premier Inn is also trying to expand abroad – mostly in the very fragmented German market. In February it announced that it was buying 19 hotels in Germany and was hoping to own 31 in the country by 2020. Maybe the new injection of cash can be used to make the rate of expansion a little more ambitious.
The combination of Costa Coffee and Premier Inn always made Whitbread an odd company; the danger is that without the fastergrowing, high-profile side of the business it might, like decaffeinated coffee, become a bit boring. Brittain must quickly lay out her accelerated growth plans for Premier Inn or the market will be asking the same question that used to be asked about Costa: “Who’ll buy it?”