Coca-Cola’s Costa Coffee deal doesn’t appear cheap
It’s certainly logical why Coca-Cola would seek to diversify out of its main business of selling sugary drinks that are increasingly subject to scorn from the public as well as the threat of additional local taxes.
But in buying Costa Coffee from Whitbread for $5.1 billion, Coca-Cola KO, -0.27% is not getting the company on the cheap.
U.K.-based Whitbread WTB, +15.35% said Coke is paying 16.4 times Costa’s earnings before interest, taxes, depreciation and amortization for its previous fiscal year.
That’s a premium to Starbucks SBUX, +0.95% which according to FactSet, has an enterprise value to previous-fiscal-year EBITDA ratio of 15.1. Dunkin’ Brands DNKN, +0.75% trades at 18.1 times its previous-year EBITDA.
Of course, Starbucks wasn’t for sale in the way Costa Coffee was, which Whitbread had been planning to split off in order to make itself a focused hotel business.
Then again, Costa also is mostly exposed to the U.K. market going through the gyrations of Brexit that should see the country exit the European Union on March 29. In its home market, same-store sales growth was 1.2% last year, and same-store sales actually fell 2% in the first quarter.
UBS in July forecast a 0.5% decline in same-store sales this year and just 1% growth in fiscal 2020, due to weak U.K. consumer spending and high inflation.
UBS highlights another problem: within a 5-minute drive, own-store cannabilization is at 71%, which it says is among the highest in the industry.
The company also has its Costa Express business, which are basically machines at other retailers. That fast-growing business recorded 9.6% sales growth in the first quarter from 8,228 machines, with plans to install another 1,300 machines this year.
Costa does have an overseas presence with over 1,400 shops, including 459 stores in China that it had planned to expand to 1,200 by 2022, as well as what it says is a profitable arm in Poland.
But while the international business accounts for about 12% of the company’s 1.29 billion pounds of annual revenue, it represented just 5% of its underlying profit before tax.
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