You won’t believe what Coca-Cola just did with Costa Coffee
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Coca-Cola's plan to sell Costa Coffee is turning into a big test of how much investors really think the beverage giant is worth.
The Financial Times says the soft-drinks behemoth is now in "last-ditch" talks with private equity firm TDR Capital after price talks broke down.The Coca-Cola board in New York chose TDR as the preferred bidder earlier this week. TDR is a co-owner of EG Group and owns the UK grocery store brand Asda.
The Financial Times, on the other hand, heard from people familiar with the process that conversations had stopped about the deal's value, which means it could fall through.
The Costa Coffee sale outcome could shape Coca-Cola’s approach to future acquisitions.Photo by NurPhoto on Getty Images Costa Coffee has struggledCoca-Cola wants about £2 billion for Costa Coffee, which is a lot less than the £3.9 billion it agreed to pay Whitbread in 2018. However, it's still a significant sum for a company that lost money last year.The business at the heart of this issue has had problems. According to the Times, Costa lost £13.8 million on £1.2 billion in sales in 2023. Based on today's exchange rate, the number means almost $18 million in losses on $1.6 billion in sales. The drop occurred because costs rose and competition got tougher, which narrowed margins.More Retail:Costco CFO makes rare pricing promiseHome Depot faces growing consumer boycott calls ahead of holidaysTarget’s efforts to make amends with customers hit a snagAmazon lawsuit could be a warning to other employersReports say Coca-Cola's plan is to sell Costa's UK business and most of its international operations to TDR while keeping a small interest in the company. If the turnaround works, this would be good for Coca-Cola and free up funding for its main drinks company. Costa's business in China is not part of the talks.Coca-Cola is changing its leaders at the same time as all this unfolds. Henrique Braun, who is now the company's chief operations officer, will become its next CEO on March 31, 2026. The current chief, James Quincey, will take over as executive chair. That means Braun might start his tenure in office with a new war chest of more than $2 billion from the sale of Costa, or with a coffee firm that is still having troubles. Regardless, exciting times are ahead.What Coca-Cola paid for Costa and what it might get nowSeven years ago, Coca-Cola purchased Costa as a way of quickly entering the worldwide coffee business. Whitbread agreed to sell the business for £3.9 billion, which was around $5.1 billion in 2018 and nearly $5.2 billion at the current exchange rate of $1.34 per pound.The Financial Times says that Coca-Cola is seeking to sell Costa for roughly £2 billion (about $2.7 billion). TDR is the preferred bidder, but it is pushing back on the price.Key Costa Coffee figures for investors, in U.S. dollars:Original acquisition price in 2018: about $5.1-$5.2 billionCurrent target sale price: about $2.7 billionImplied value gap versus purchase price: roughly $2.4-$2.5 billionCosta 2023 revenue: about $1.6 billionCosta 2023 net loss: about $18 millionCoca-Cola's larger business, on the other hand, is still very profitable. The company made $45.8 billion in net revenue and had an operating margin of 24.7% in 2023. This shows how far Costa has fallen behind the rest of the portfolio.Why TDR wants Costa and how the economics could workTDR Capital wants to buy Costa's UK and worldwide businesses, but not its Chinese operation. The agreement would let Coca-Cola keep a small interest in the company.For TDR, the appeal is more strategic than sentimental:Asda stores and EG Group forecourts might use Costa's retail network and Costa Express machines together.A well-known brand that is losing money offers flexibility to make operational changes and enhance margins.Coca-Cola's minority share helps close the difference in valuations while sharing the risk of losing money.The bidding procedure has already narrowed. According to The Financial Times and follow-up reporting, Bain Capital's special circumstances arm and Centurium Capital, the private equity owner of Luckin Coffee, are also interested. Apollo and KKR have dropped out of the process.What the Costa decision means for Coca-Cola investorsCoca-Cola is still doing well financially as a group. The company's market valuation is above $300 billion. Its most recent quarterly results revealed $12.5 billion in sales, a 5% increase from the same time last year, while operating margins rose to 32%.For shareholders, the Costa conclusion is less about making money right away and more about keeping their money safe:A sale of close to $2.7 billion would officially show that the 2018 purchase went too far.The money might be used for share buybacks, brands with stronger growth, or bolt-on acquisitions.If Costa stayed, Coca-Cola would have to operate a capital-intensive, money-losing retail chain, which would not be beneficial to the business.If those conversations end in a sale at a lower price, a transaction with a smaller share, or an auction that fails, it will show how eager Coca-Cola is to clean up previous mistakes as it prepares for its new leadership phase.Related: Box office is booming in 2025 but Netflix’s $82.7 billion surprise raises alarms