Whitbread shares jump 20% following sale of Costa

Coffee chain was sold for a ‘great price’ to Coca Cola

Article updated: 31 August 2018 9:00am Author: Helal Miah

  • Whitbread agrees to sell Costa Coffee chain to Coca Cola for £3.9bn.
  • Timing of sale seen by many as being astute whilst others question prematurity.
  • We recommend Whtibread as a ‘hold’ given reduced possibilities of further share price rise.

This morning, in a move that came along much sooner than we expected, Whitbread announced that it has sold its Costa Coffee chain to the deep pocketed Coca-Cola Company. Important to note is that the chain was sold for what we and the markets deems as a great price, coming in at £3.9bn. The CEO of Whitbread said this is a “Deep Premium” to what the company could have raised through a demerger and the share price has leapt by roughly 20% at market open in reaction.

The timing of the deal by Whitbread will be seen by many as being astute, given that Costa Coffee was bought for £19m 23 years ago and sold at what could be a peak in the cycle after a couple of decades of strong growth in coffee market and the rise of the coffee culture. However, some others will say that Whitbread may be too premature in selling given that Costa Coffee in China is set to experience strong growth in the next few years.

The sale is a quicker and cleaner process than a demerger and will allow Whitbread to sooner focus on building its Premier Inns hotel brand and restaurant chains. The proceeds from the sale should also allow Whitbread to pay down its debt and make contributions to the pension fund. For Coca-Cola, the group obviously see value in the deal given that they lack exposure to the coffee industry and should be much better at further expanding the Costa Coffee brand given its global distribution networks. Whitbread investors can additionally look forward to the possibility that some of the proceeds from the sale could return to them. It will also appease activist investors who jumped on-board over the last year and pushed for the split, ultimately earning them a healthy return on investment.

Given, the jump in the share price today, we see little further possibilities in the shares rising much further. Therefore, we continue to recommend Whitbread as a ‘hold’ for medium risk investors seeking a balanced return and willing to accept a medium level of risk.

All information given including prices, yields and our opinion is correct at the time of publication. Our opinions on investments can change at any time and for our latest view please go to www.share.com. To understand how our Investment research team arrive at their views please read our Investment Research Policy.

Helal Miah portrait photo
Helal Miah

Investment Research Analyst

After graduating with an economics degree from University College London, Helal started his career within private banking at Smith & Williamson Investment Management and later held analyst and fund manager roles with the Industrial Bank of Japan, Schroders and Mitsubishi Corporation. He is a chartered fellow of the Chartered Institute for Securities & Investment.