Analysts corner: Goodbody and HL on Costa Coffee

Following the news that Whitbread has agreed to sell Costa Coffee to The Coca-Cola Company for £3.9bn in cash, Hargreaves Lansdown and Goodbody give their views on this landmark deal, which saw shares rise 18.4% in early trading

The note from Nicholas Hyett, equity analyst at Hargreaves Lansdown states that the deal values Costa at 16.4 times EBITDA (earnings before interest, tax, depreciation and amortisation), and will leave Whitbread with net cash proceeds of £3.8bn after transaction costs. By comparison Starbucks only trades at 14.4 times last year’s EBITDA.

The majority of this cash will be returned to shareholders, although Whitbread will also reduce debt and make a contribution to the pension fund. This will support continued expansion of Premier Inn in the UK and Germany.

“This is a bitter sweet moment for Whitbread investors. On the one hand £3.9 billion is an undeniably rich valuation and likely far better than Costa could achieve as an independently listed company, valuing its earnings higher than those of the mighty Starbucks. On the other, Costa has long been the jewel in Whitbread’s crown and some will be sad to see it go at any price, especially given the growth potential in China and elsewhere.

“It’s hard to see how things could have turned out differently given the price on offer though, and Coca-Cola are one of the few companies in the world that could justify the valuation. Its global reach should turbo-charge growth in the years to come, and hot drinks are one of the few areas of the wider beverages sector where the soft drinks giant doesn’t have a killer brand. Costa will get lots of care and attention.

“It’s worth bearing in mind exactly what Whitbread has achieved with the brand. Having bought Costa’s 39 stores for £19m in 1995, the sale price represents a compound annual growth rate of around 25%. Delivering that over a 24-year period is hugely impressive and represents incredible value creation for shareholders.

“What remains of Whitbread, essentially just Premier Inn, will focus on expansion plans in the UK and Germany from here on. Progress has been good and we believe the product is excellent, but it’s a very different business to Costa and growth will be slower and demand more up-front investment. An excellent deal it may be, but Whitbread investors may miss the caffeine highs Costa serves up.”

Rachel Fox, gaming and leisure analyst at Goodbody, says: “Overall, this represents a great deal for Whitbread and the multiple being paid is significantly ahead of the higher end of market expectations (c.13x).

“Looking at the new group (i.e. Premier Inn) it would appear the new EV/EBITDA of the group is <7x. Given we would place a value of 11x on Premier Inn the new group looks particularly cheap.

“We believe on a standalone basis Premier Inn is an attractive business, and while there is some turbulence in the UK hotel market at present, we consider Premier Inn as relatively resilient given its market leading presence in the budget branded hotel market.”