Coke To buy UK Coffee-Shop Chain Costa For $5.1B

Coca-Cola Co. on Friday said it would buy British coffee-shop chain Costa for $5.1 billion, diversifying further from its soft-drink roots and marking the latest bet by a major consumer-goods company on coffee.

The move would mark the biggest brand acquisition in the history of Coca-Cola and a gamble that the soda giant can move into the crowded retail world and take on Starbucks Corp., which has more than 27,000 cafes around the globe.

The deal gives Coke a large brick-and-mortar retail presence, though not in the U.S. Costa has nearly 4,000 stores in 32 countries, including a growing presence in China. Founded in London in 1971, it also sells coffee in grocery stores and gas stations.

In an interview, Coca-Cola CEO James Quincey said the transaction was a bet on the fast growing and still fragmented global coffee business. “This is a coffee strategy, not a retail strategy,” said Mr. Quincey, a Brit who took over as Coke’s CEO in May 2017.

Mr. Quincey said Coke has no current plans to open Costa coffee shops in the U.S., but the company will bring Costa coffee vending machines and beans to U.S. gas stations, college campuses and quick-service restaurants.

“Consumers continue to want to spend more money on beverages,” Mr. Quincey said. “They just want greater diversity” including “coffee in its various formats.”

Soft-drink makers have been searching for growth as consumers shift away from sugary sodas. PepsiCo Inc. earlier this month bought seltzer-machine maker SodaStream International Ltd. for $3.2 billion. Smaller rival Dr. Pepper Snapple merged this summer with Keurig, the coffee company that popularized single serve K-cups.

Coke said its Costa purchase would give it a strong position in coffee across parts of Europe, Asia and the Middle East and would allow it to expand Costa in China. It already sells some coffee products and owns the world’s largest ready-to-drink coffee brand, Georgia, which has strong sales in Japan.

Coffee has recently been a hot area for deal-making. Nestlé SA earlier this year bought the rights to sell Starbucks in grocery and retail stores for more than $7 billion. JAB Holding Co., a European holding company, also has moved aggressively to buy up coffee assets.

Coke is buying Costa from British leisure group Whitbread PLC, which also owns the Premier Inn hotel brand in the U.K. and Germany. The company, which first flagged a possible Costa spinoff in April, said it would return most of the money to its shareholders. Its shares soared 18% in early trading Friday.

Whitbread Chief Executive Alison Brittain said that Coke wasn’t the only interested party, but suggested that the U.S. drinks giant’s global reach allowed it to offer the most attractive deal. The agreement, expected to be completed in the first half of 2019, was signed only eight minutes before it was announced early Friday.

Costa generated revenue of GBP1.3 billion ($1.69 billion) in the year ended March 1 and earnings before interest, taxes, depreciation and amortization of GBP238 million. By comparison Starbucks had $22.4 billion in revenue in its last fiscal year and Coca-Cola had $35.4 billion.

Write to Jennifer Maloney at jennifer.maloney@wsj.com and Ian Walker at ian.walker@wsj.com

The move would be the biggest brand acquisition in the history of Coca-Cola and a gamble that the soda giant can move into the crowded retail world and take on Starbucks Corp., which has more than 27,000 cafes around the globe.

The deal gives Coke a large brick and mortar retail presence, though not in the U.S. Costa’s red-and-white colored cups are served from its roughly 4,000 cafes, including about 2,500 in the U.K. and a growing presence in China. Founded in London in 1971, it also sells coffee in grocery stores and gas stations.

In an interview, Coca-Cola CEO James Quincey said the transaction was a bet on the fast-growing and still fragmented global coffee business. “This is a coffee strategy, not a retail strategy,” said Mr. Quincey, a Brit who took over as Coke’s CEO in May 2017.

“Consumers continue to want to spend more money on beverages,” Mr. Quincey said. “They just want greater diversity” including “coffee in its various formats.”

Coke and its soda rivals have been searching for growth as consumers shift away from sugary soft drinks. PepsiCo Inc. recently bought seltzer-machine maker SodaStream International Ltd. for $3.2 billion. Smaller rival Dr Pepper Snapple merged this summer with Keurig, the coffee company that popularized single-serve K-cups.

Coke already sells some coffee products and owns a ready-to-drink coffee brand called Georgia that is popular in Japan, but Coke said the purchase would give it a stronger coffee presence in parts of Europe, Asia and the Middle East and would allow it to expand Costa in China. Rival PepsiCo has a longstanding partnership with Starbucks to sell its ready-to-drink beverages.

Coffee has recently been a hot industry for deal-making. Nestlé SA earlier this year bought the rights to sell Starbucks in grocery and retail stores for more than $7 billion. JAB Holding Co., a European holding company, has also moved aggressively to buy up coffee assets.

Whitbread had been pressured by activist investors to split with its coffee business. Coke approached the company about a potential acquisition in June, executives said.

Whitbread Chief Executive Alison Brittain said that Coke wasn’t the only interested party, but suggested that the U.S. drinks giant’s global reach allowed it to offer the most attractive deal. The agreement, expected to be completed in the first half of 2019, was signed just eight minutes before it was announced early Friday.

Costa same-store sales have been flat, though overall sales have continued to grow as the company added outlets, including overseas, and expanded its express coffee machine network. Some of the sales through those machines have cannibalized business from existing outlets, Ms. Brittain said on a conference call on Friday.

Costa has more locations in the U.K. than Starbucks but the brand is little known in North or South America, where Starbucks has more than 16,000 locations. Costa’s biggest international market is China, where it has about 450 stores, but there too it is dwarfed by Starbucks’ approximately 3,000 locations.

Costa’s presence in China presents a growth opportunity for Coke, GlobalData analyst Jonathan Davison said. Hot-drinks sales have more than doubled in volume there over the past five years, said Mr. Davison, who estimates the Chinese retail hot drinks market will reach $34 billion by 2022.

Mr. Quincey acknowledged that expanding into retail would pose a challenge for the beverage manufacturer, which currently relies on distributors, grocers and restaurants to sell its drinks. Retail is “clearly not our expertise,” he said, adding that Coke will keep Costa’s retail management team in place.

Coke said it expects the deal to close in the middle of 2019 and the transaction to add slightly to its earnings the following year. The company said it wasn’t changing its long-term financial targets.

When Mr. Quincey took over Coke from longtime leader Muhtar Kent, he pledged to speed the development of products beyond its namesake cola brand. The company’s revenue has declined for several years, as it shed bottling operations and battled slowing soda volumes.

Coke’s biggest acquisition until now was its $4.1 billion purchase in 2007 of Glaceau, the company behind the vitaminwater and smartwater brands. The company has struck smaller deals since Mr. Quincey took over, including buying Mexican seltzer maker Topo Chico and taking a stake in BodyArmor, a Gatorade rival.

Coca-Cola shares were little changed near $45 in premarket trading. The stock has slipped 2% over the past year, missing out on a broad stock market rally that has lifted the S&P 500 Index more than 17% to record highs.

–Robert Wall contributed to this article.

Write to Jennifer Maloney at jennifer.maloney@wsj.com and Ian Walker at ian.walker@wsj.com

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