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Coca-Cola on Friday announced a surprise move to buy Costa Coffee, one of Europe’s largest café chains, from the British company Whitbread for £3.9 billion, or $5.1 billion.
Whitbread has been clear for a while that it wanted to off-load Costa, and it initially planned to spin off the company from its main business. It settled on a sale, however, after an approach from Coca-Cola in June.
On the surface, the move makes sense for both sides of the deal, with Whitbread earning significantly more from the sale than it would have from a spinout and Coca-Cola getting a well-established brand in a space it is looking to enter.
But how are analysts in the City of London and on Wall Street reacting to the news, one of the biggest leisure deals of 2018 so far? To find out, Business Insider rounded up some of the notes and analysis circulated on Friday.
Check them out below.
Credit Suisse: “A huge premium”
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The Swiss lender focuses on how much Coca-Cola is paying over Costa Coffee’s public-market valuation.
“A huge premium to that implied by the market: We valued Costa at £2.5bn in our 5280p SOTP based on a 10x 2019E EBITDA multiple,” a team of analysts led by Tim Ramskill wrote.
“The disposal price of £3.8bn (after transaction costs) implies a 15.7x multiple. We estimate the current share price was discounting a multiple of 8.0x and therefore the deal adds £2.0bn of value or 1075p per share compared to the close price.”
In Credit Suisse’s view, the deal is essentially twice as costly as it perhaps should have been.
Citi: A $4.2 billion boost to Whitbread
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Monique Pollard and her team at Citi believe the deal will give Costa Coffee’s parent company, Whitbread, a £3.2 billion ($4.15 billion) boost on its balance sheet.
“The transaction is a cash and debt-free deal, with Whitbread’s financial debt and pension fund staying with Premier Inn. We estimate c.£3.2b of cash proceeds available post transaction costs, pay-down of Whitbread’s pension deficit and cash to be spent on management’s previously announced German hotel acquisitions.”
Hargreaves Lansdown: A “bitter sweet moment”
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“This is a bitter sweet moment for Whitbread investors,” Nicholas Hyett, an equity analyst at Hargreaves Lansdown, said.
“On the one hand £3.9 billion is an undeniably rich valuation and likely far better than Costa could achieve as an independently listed company, valuing its earnings higher than those of the mighty Starbucks.
“On the other, Costa has long been the jewel in Whitbread’s crown and some will be sad to see it go at any price, especially given the growth potential in China and elsewhere.
“It’s hard to see how things could have turned out differently given the price on offer though, and Coca-Cola are one of the few companies in the world that could justify the valuation.”
Euromonitor International: The final piece of the puzzle for Coca-Cola
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The market-research firm Euromonitor focuses on Coca-Cola filling the one gap it has in its drinks portfolio.
“Hot beverages are one of the few remaining segments of the total beverage landscape where Coca-Cola does not have a global brand and Costa gives them access to this market through a strong coffee platform,” the analyst Maxine Vogt wrote.
IG Group: A shrewdly timed move by Whitbread
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Joshua Mahony, a market analyst at IG, sees the sale as smartly timed by Whitbread given the current policy landscape in the UK.
“Whitbread’s sale of Costa Coffee to Coca-Cola could prove a shrewd move at a time where we are seeing the government cracking down on high caffeine products. There is little reason to believe that we will see a crackdown on coffee, yet there is a feeling that the public is becoming aware of the negative effects of high caffeine intake,” he wrote in an email.
“There is an argument over recent years that points towards a saturation point for UK coffee stores, and with this move, Whitbread seems to have exited the market at a great point.”
Northern Trust Capital Markets: “Deserving of kudos”
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“As changes of direction go, the announcement by Whitbread CEO Allison Brittain that the company is selling Costa to Coca-Cola for £3.9bn, rather than plan announced in April to spin it off and list it as a publicly traded company is one deserving of kudos,” Oliver Sherman wrote.
“Whitbread has generated quite the return on the c.£19m paid over 20 years ago. Whitbread’s share price jumped in early trading as shareholders focused on the cash windfall rather than the long-term challenges ahead for Premier Inns and its related restaurants businesses.”