Coca-Cola buys coffee chain for $5 billion

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Coca-Cola making an audacious move into coffee and retail outlets with the 3.9 billion-pound (US$5.1 billion) purchase of United Kingdom chain Costa, its biggest acquisition in eight years and a push into the fiercely competitive java market.

Whitbread has owned Costa since 1995, when it bought it for just £19m.

Costa is Britain's biggest coffee company, with over 2,400 coffee shops in the United Kingdom and another 1,400 in more than 30 countries, including around 460 in China, its second-biggest market.

Whitbread shares leapt as much as 19 percent to a 2-1/2 year high of 48 pounds on news of the deal, which analysts said was priced at a punchy 16.4 times Costa's latest annual earnings.

Whitbread had plans to spin out the Costa brand, but the sale to Coca-Cola has come as something of a surprise to many in the market, given that Coca-Cola has no presence in coffee.

"Hot beverages are one of the few remaining segments of the total beverage landscape where Coca-Cola does not have a global brand", Coca-Cola chief executive officer James Quincey said in the statement.

The British company Whitbread is selling Costa for £3.9 billion, or R74 billion.

JAB added the United Kingdom -based food-and-coffee chain Pret A Manger in a US$2 billion deal earlier this year, following its past acquisitions of high-end coffee brands Peet's and Stumptown.

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

Director of the Institute for Public Policy Research Tom Kibasi claims the deal is "bad news for Britain", because "Coca-Cola is one of the world's worst tax dodgers and least ethical companies".

Then Coca-Cola got in touch with what Whitbread said was a "highly compelling" offer.

While the bulk of the proceeds will be returned to shareholders, it will use some of the cash to pay down debt and address its £350-million pension deficit, to give it the flexibility to continue expanding its Premier Inn hotels in Britain and Germany, which will become its main business.

Still, Costa outranks Starbucks in the United Kingdom - it also operates a business of 8,000 self-service machines - and is expanding in markets such as China.

Since announcing the sale, Whitbread's shares have jumped up 17 per cent this morning.

A significant majority of net cash proceeds meant to be returned to shareholders, Whitbread added.