Coca-Cola to buy United Kingdom coffee chain Costa for $5.1B

Costa Coffee

Costa Coffee

Coca-Cola Co has agreed to buy coffee chain Costa for $5.1 billion to extend its push into healthier drinks and take on the likes of Starbucks and Nestle in the booming global coffee market.

But on Friday the company said a sale of the business is now "in the best interests of shareholders".

The move is Coca-Cola's latest diversification as health-conscious consumers, at least in America, move away from traditional soda.

In a press release, Coca-Cola CEO James Quincey acknowledged the importance of Costa in supporting Coke's evolution into a "total beverage" company, as it gives the beverage giant a foothold in hot beverages, "one of the few segments of the total beverage landscape where Coca-Cola does not have a global brand".

Costa Coffee has more than 2,400 outlets. Coca-Cola's chief rival Pepsi announced earlier this month that it would buy Israeli DIY seltzer company SodaStream for $3.2 billion. "Starbucks must be furious as there is no doubt that Coke will launch Costa Coffee brands to compete on the retail shelves, because Starbucks dominates that grab-and-go coffee market".

Coffee has been one of the frothiest markets for mergers and acquisitions activity over the past year, as competition between Swiss group Nestlé and JAB Holdings - the private investment group that manages the wealth of Germany's billionaire Reimann family - has heated up.

Costa, which has more than 2,400 United Kingdom shops and a further 1,400 in 30 countries, is likely to see more vending machine coffee sales and the creation of "ready to drink cold brew coffees".

Costa Coffee will return most of the proceeds from the Coca-Cola to shareholders. According to reports, the deal will be finalised in the first half of 2019.

Meanwhile, a roll-out of canned or bottled coffee drinks through Coke's bottling system could upset the dominance of a joint venture between Starbucks and PepsiCo. Although it gets 3,800 stores in 32 countries and a foothold in China, its USA focus is expected to be ready-to-drink coffee beverages.

The group said earlier this year it would split Costa and list it as a separate firm, following pressure from activist investor Elliott.

Proceeds of the sale will be used to pay down debt and boost the pension fund. The Swiss food company also paid $7.2 billion to form an alliance with Starbucks that sells products in grocery stores.

JAB added the United Kingdom -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.

Coke has dabbled in coffee before, with an unsuccessful attempt at selling java-flavoured Coca-Cola Blak. Coke had been working with Keurig on a since-scrapped cold version of the coffee brewer's single-serve machine.

Coke could also potentially use the stores as a pick-up location for customers who may want to order products directly from the company's website, Lawrie said.

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