LONDON -- As consumers shy away more and more from sugary soft drinks, Coca-Cola has found a new way to cater to them: serve them coffee.
The U.S. beverage titan said Friday that it planned to buy Costa, one of the world's biggest coffee chains, for $5.1 billion in cash.
The deal -- Coke's biggest acquisition in almost a decade -- shows just how much the company is willing to spend to keep up with changing tastes.
Coke's sales have been falling for the past five years, as consumers spurn the sugary drinks that have long underpinned its business empire. That shift away from soda has forced the entire industry to find new businesses.
PepsiCo, for instance, has refocused on healthier snack offerings, and this month agreed to buy SodaStream, which now emphasizes its ability to make flavored sparkling water at home, for $3.2 billion.
Coke, by contrast, has jumped squarely into a red-hot battle in the coffee world, where two food giants have spent tens of billions of dollars to build their empires.
One is Nestle, which owns Nescafe and the high-end Blue Bottle chain, and which recently closed a $7.15 billion deal for the exclusive marketing rights to Starbucks products.
The other is JAB, the acquisitive European conglomerate that has remade the coffee industry through a spending spree that has seen it pick up Peet's Coffee, Caribou Coffee, Stumptown and others.
In all of their sights is the fast-rising consumption of coffee around the world, as well as the myriad ways that java can be served, from complex creations in coffee shops to pods that can be dropped into machines at home. Coca-Cola is betting that its vast distribution network can help it muscle into the business, serving up products in kitchens as well as stores.
"It's more important than ever that Coca-Cola make a serious and significant investment in the category, because it's the right thing to do to serve our consumers with more of the drinks they want, which in turn helps our customers," James Quincey, Coke's chief executive, wrote in a corporate blog post.
With JAB having snapped up so many coffee shops, Coke chose an obvious target: Britain's biggest coffee chain, which itself helped persuade a nation of tea drinkers to gulp a different kind of brew.
Founded as a roastery in London 47 years ago by two brothers, Costa now trails only Starbucks and McDonald's in its number of worldwide coffee locations.
When Costa's current owner, British hospitality company Whitbread, bought the chain in 1995, it had just 39 stores. Now the coffee business has more than 2,400 outlets in Britain and 1,400 in other markets around Europe and Asia, as well as 8,000 Costa Express self-serve machines.
Its sales in Britain have been stagnant in recent years, as consumers have tightened their wallets amid concerns about inflation. Those who have continued buying cups of coffee have opted for the more artisanal experiences and products offered by upstarts, which have snatched a small but growing slice of the market.
Whitbread had responded over the last three years by building more international stores, trying to make the Costa brand more of a rival to Starbucks, particularly in China. Those expansion efforts were what drew the attention of British-born Quincey.
"Costa is a good fit -- and the best way -- for Coca-Cola to add a global coffee platform that will complement our existing system," he wrote.
What made Friday's deal possible was Whitbread announcing in April that it was spinning off the Costa business, amid pressure from activist shareholders like hedge funds Elliott Management and Sachem Head, to focus on its faster-growing Premier Inn line of hotels.
Soon afterward, Whitbread heard from Coke, which offered a knockout price. The transaction values Costa at more than 16 times the pro forma earnings for its 2018 fiscal year. Given that offer and what Coke could do to accelerate Costa's growth plans, starting talks made a huge amount of sense, according to Whitbread's chief executive, Alison Brittain.
"Costa gets all the scale and distribution and reach of Coca-Cola that the original business couldn't do on its own," Brittain said.
Investors in Whitbread appeared pleased with what Brittain told analysts was an "absolute stonking" deal.
It will also contribute to the company's pension fund, she told CNBC in an interview Friday, and help pay off company debt.
The proposed deal is expected to close at the end of summer 2019, Coca-Cola said, if it gains regulatory approval in the European Union and China.
"This transaction was a marriage made in heaven," Brittain said in the interview.
Information for this article was contributed by Hamza Shaban of The Washington Post.
Business on 09/01/2018