Coca-Cola takes big step into coffee with $5.1 billion Costa deal

Coca-Cola Co has agreed to buy the world's second largest coffee chain Costa from Britain's Whitbread Plc for $5.1 billion including debt, opening a new front in its push into healthier markets.

The two companies said on Friday that Coke, one of the biggest soft drinks groups in the world, would buy Costa's almost 4,000 outlets across markets such as Britain, Europe and China after Whitbread's board unanimously backed the deal.

Whitbread shares jumped 19 per cent in early trading, with dealers saying the purchase price was more than 700 million pounds ($911 million) higher than expected.

The purchase of the biggest coffee chain behind Starbucks adds to Coca-Cola's drive to diversify away from fizzy drinks and expand its options for increasingly health-conscious consumers after countries started introducing sugar taxes.

"Hot beverages is one of the few segments of the total beverage landscape where Coca-Cola does not have a global brand," Coca-Cola CEO James Quincey said. "Costa gives us access to this market with a strong coffee platform."

Established in 1742 as a brewer, Whitbread had been in the process of demerging Costa from its Premier Inn hotel chain after it came under pressure from hedge funds. The deal marks the latest transformation of a group that has held assets across the leisure, food and drink sectors.

Whitbread acquired Costa in 1995 for 19 million pounds when it had only 39 shops. It is now present on most British high streets, with 2,422 outlets across the country and a further 1,399 in international markets, operated as franchises, joint ventures and wholesale outlets.

It has recently expanded into China after growth in Britain became harder to find in a market bursting with chains such as Starbucks, Caffe Nero and thousands of independent outlets.

Whitbread said it would cut debt and contribute to its pension fund with proceeds from the deal and further expand its hotel chain Premier Inn in Britain and Germany.

"The announcement today represents a substantial premium to the value that would have been created through the demerger of the business and we expect to return a significant majority of net proceeds to shareholders", Chief Executive Alison Britain said.

Rothschild advised Coke on the deal.