Coca-Cola has paused efforts to sell its Costa Coffee business after receiving offers from private equity investors that did not meet its valuation expectations. This is as per a report by the Financial Times.
The US beverage maker ended talks with shortlisted bidders in December, effectively drawing a line under a sale process that had stretched over several months. The company had explored multiple deal structures but ultimately chose not to proceed, FT reported.
Who was in the race
Among the investors that reached advanced discussions were TDR Capital, the owner of UK supermarket chain Asda, and Bain Capital’s special situations fund, which holds stakes in Gail’s bakery chain and PizzaExpress. This is as per the FT report. Other firms, including Apollo Global Management, KKR and Centurium Capital, had participated in earlier rounds of the process, the FT report added.
The report also added that Investment bank Lazard was advising Coca-Cola on the potential divestment.
Valuation gap proves sticking point
Coca-Cola was understood to be seeking a valuation of about £2 billion for Costa Coffee, a sharp discount to the roughly £3.9 billion it paid to acquire the business from Whitbread in 2018, as per Financial Times. Some proposals would have allowed Coca-Cola to retain a minority holding in the coffee chain, but pricing remained a key obstacle, the report said.
Operational challenges at Costa
Costa Coffee operated more than 2,700 outlets across the UK and Ireland. Over the past few years, the company has faced pressure over changing consumer behaviour and rising competition in the category. As per FT, the chain has struggled to position itself between higher-end independent cafés and lower-priced rivals, while weaker high-street footfall has weighed on sales.
For 2024, Costa reported an operating loss of £13.5 million on revenues of £1.2 billion, according to filings with UK authorities, as per the FT report. The company cited higher labour costs, elevated coffee bean prices and subdued consumer demand as major headwinds.
Write-down risks and China setback
The stalled sale increases the risk that Coca-Cola may need to reassess the carrying value of Costa on its balance sheet. Last year, the group took an impairment charge of £48.6 million on Costa’s China business, citing weaker-than-expected demand in major cities, as per Financial Times. Separately, Costa’s self-service coffee machine unit wrote down assets after abandoning certain product prototypes.
Leadership transition at Coca-Cola
The decision comes ahead of a leadership change at Coca-Cola, with chief operating officer Henrique Braun set to take over as chief executive from James Quincey in March. Quincey, who will move into the role of executive chair, has previously acknowledged that Costa has not met performance expectations under Coca-Cola’s ownership, the FT report said.
While the current process has been halted, Coca-Cola could revive plans to sell Costa Coffee at a later stage if market conditions improve, the Financial Times report stated