'A huge premium': Here's how analysts are reacting to Coca-Cola's deal to buy Costa Coffee

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Coca-Cola on Friday announced a surprise move to buy Costa Coffee, one of Europe's largest cafe chains, from current owners Whitbread for £3.9 billion ($5.1 billion). 

Whitbread has been clear for a while that it wanted to offload Costa, and had initially planned to spin off the company from its main business. However, it settled on a sale after an approach from Coca-Cola in June.

On the surface, the move makes sense for both sides of the deal, with Whitbread earning significantly more from the sale than it would have from a spin out, and Coca-Cola getting a well established brand in a space it is looking to enter.

But how are analysts in the City of London and on Wall Street reacting to the news, one of the biggest leisure deals of 2018 so far? To find out, Business Insider rounded up some of the notes and analysis circulated on Friday.

Check them out below.

Credit Suisse: "A huge premium"

Reuters/Phil Noble

The Swiss lender focuses on how much higher a valuation Coca-Cola is paying for Costa Coffee than the market currently values it.

"A huge premium to that implied by the market: We valued Costa at £2.5bn in our 5280p SOTP based on a 10x 2019E EBITDA multiple," a team of analysts led by Tim Ramskill wrote.

"The disposal price of £3.8bn (after transaction costs) implies a 15.7x multiple. We estimate the current share price was discounting a multiple of 8.0x and therefore the deal adds £2.0bn of value or 1075p per share compared to the close price."

Effectively, the deal is twice as costly as it perhaps should have been.

Citi: A $4.2 billion boost to Whitbread

Flickr/Mike Mozart

Monique Pollard and her team at Citi believe the deal will give Costa Coffee's parent company, Whitbread, a £3.2 billion ($4.15 billion) boost on its balance sheet.

"The transaction is a cash and debt-free deal, with Whitbread’s financial debt and pension fund staying with Premier Inn. We estimate c.£3.2b of cash proceeds available post transaction costs, pay-down of Whitbread’s pension deficit and cash to be spent on management’s previously announced German hotel acquisitions."

Hargreaves Lansdown: A "bitter sweet moment"

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"This is a bitter sweet moment for Whitbread investors," Nicholas Hyett, equity analyst at Hargreaves Lansdown said.

"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."

See the rest of the story at Business Insider

See Also:

• Goldman Sachs, Deutsche Bank, and Rothschild are all getting a slice of Coca-Cola's game-changing $5.1 billion deal for Costa Coffee
• Coca-Cola just became a giant threat to Starbucks after buying one of Europe's biggest coffee chains for $5.1 billion
• RBC: Hedge funds are piling into these 12 stocks unlike any others on the market

SEE ALSO: Goldman Sachs, Deutsche Bank, and Rothschild are all getting a slice of Coca-Cola's game-changing $5.1 billion deal for Costa Coffee

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