Beverage giant The Coca-Cola Company (KO) is exploring a sale of Costa, the UK’s largest high street coffee chain, Sky News reported. The move signals a potential reversal of the strategy to diversify away from sugary soft drinks.
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It is worth noting that Coca-Cola acquired Costa in 2018 for over £3.9 billion, aiming to diversify beyond sugary sodas and challenge Starbucks (SBUX) and Nestle (NSRGY) in the booming coffee market.
But now, Coca-Cola has engaged investment bank Lazard (LAZ) to explore options, including a potential sale. Importantly, early talks have begun with some private equity firms. The potential sale is expected to value Costa at around £2 billion, leading to a multi-billion-pound loss for Coca-Cola.
Still, Coca-Cola’s market cap exceeds $300 billion, so selling the coffee chain is unlikely to have a large financial impact on the company.
Costa’s Mixed Track Record Under Coca-Cola
At the time of the acquisition, Coca-Cola CEO James Quincey noted that Costa’s strong brand could help KO grow in the global hot drinks market.
However, recent financial reports indicate that Costa’s 2023 revenue was £1.22 billion, below the £1.3 billion it generated in 2018, just before Coca-Cola’s takeover. It also recorded a £9.6 million loss, citing inflationary pressures and investment impairments.
Costa currently operates more than 2,000 stores in the UK and over 3,000 globally. Despite the financial struggles, the company has paid more than £250 million in dividends to Coca-Cola since the acquisition.
Is KO a Good Stock to Buy?
On TipRanks, KO stock has a Strong Buy consensus rating based on 15 Buys assigned in the last three months. The average Coca-Cola stock price target of $80.07 suggests an upside potential of 14.17% from its current price. Year-to-date, shares of the company have gained about 16.88%.
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