this is just gonna be a little video
talking about the big news of the day
which is Coca Cola has agreed to buy
Costa Coffee now the deal is worth
apparently three point nine billion
pounds which is I think a 5.1 billion
dollars and I think it makes to some
extent a little bit of sense we should
give I think a tiny bit of backstory so
Costa is a UK coffee chain started in
the early 1970s and in 1995 for the sum
total of 19 million pounds it was
acquired by company called Whitbread who
had been Brewers they owned a hotel
chain in the UK and Whitbread are a
publicly traded company fast forward to
today and Whitbread had ended up being
kind of forced by an activist investor
into splitting Kosta out as a business
so while Whitbread publicly traded Costa
Coffee are not so the idea is caustic
offi will become a separate standalone
business potentially to be publicly
traded on the stock market but what
ended up happening instead is that
Whitbread have agreed to sell it to
coca-cola for a web browser point of
view this is pretty great news they have
sold it for an enormous amount more than
they paid for it as well as what seems
like a very rich valuation so typically
we're valuing a company we use a metric
called EBIT da which stands for earnings
before interest tax asian depreciation
and amortization it's a pretty
standardized way of measuring the
profitability of a company and whatever
that number is you might then add a
multiple to it to create a valuation
companies that have large potential for
growth tend to attract higher
multiplications higher multiples of that
EBIT are number in this case cost are
sold for sixteen point four times its
EBIT de which is a staggeringly high
valuation and so while Costa may have
close to 4,000 cafes around the world
now that is still a very very healthy
valuation of that company what makes
that more surprising is that Costa as a
business actually isn't doing all that
well it has been continuing to grow but
mostly through new store openings it's
like for like sales had been flat or
actually on the decline so as a cafe
business it definitely doesn't bear
healthy why is this interesting to
coca-cola so Cola
doesn't really have a strong coffee
brand in its portfolios of its brands
and products out there I think eight
brands I suppose would be connected to
coffee in some way but there's nothing
that is a solid strongly coffee focused
brand for them so cost is interesting
and Casta right now has no
ready-to-drink product there is no cost
to cold brewing in shops to buy they
don't really do that
so coca-cola unquestionably must be
looking at Kosta as their solution for
bottled ready to drink coffee sales and
growing the business that way now is
actually a pretty tough time to sell
soft drinks there's increasing taxes on
sugar you are the bad person in the
obesity epidemic
whereas coffee bottled canned ready to
drink coffee is unquestionably booming
in popularity around the world it's a
growing category so for coca-cola this
makes perfect sense they're very good at
putting stuff in bottles but they're
even better a distribution and that's
Coca Cola's great strength their
distribution network and their delivery
network their supply network it's not
just the endless people in vans driving
stuff all over the world
it's vending machines it's every every
kind of distribution point that they
have access to and so for them to get a
coffee brand that is sufficiently widely
accepted that they could start to put
that brand in every coca-cola vending
machine and have it moved that I think
that's a real strategy for them so the
deal I think we'll go through early 2019
and I would say very quickly after that
I think we're gonna start to see a lot
of Costa ready to drink bottled canned I
don't know exactly what they'll do but
that format that's gonna be everywhere
and that's not really any particular
insight from me they've publicly stated
that this is unquestionably going to be
their plant so they bought a brand that
gives them access to a market through
which they already have the distribution
network it's a sensible play for
coca-cola I guess now that we've proven
as an industry that ready to drink
coffee is is a category that's growing
theirs meaningful it's valuable and that
is here to stay now as an addendum to
this I did make a video at the start of
the year talking about some predictions
and one of them was that Costa would
make a play into specialty
I still think that may happen like I
said the stores themselves I'm not doing
that well they're struggling in this
market and so they definitely need some
sort of injection of something into the
stores into their into their retail
bricks-and-mortar offering to make that
business thrive a little bit more than
it is as I said the like for likes are
in a bad place right now and they
definitely know they must need to make a
change what that will be I still don't
know but I would say it's still
reasonably likely regardless of who the
parent company is whether the parent
company is a is interested in hotels or
interested in soft drinks for Costa the
problem remains the same their audience
is not growing the way they want it to
so there's my insight there's my
thoughts on this deal announced today I
would love to hear your thoughts in the
comments down below let me know if you
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great day