Steam surrounds a disposable coffee cup as it is filled at a machine in a Costa Coffee shop, operated by Whitbread Plc, in London, U.K., on Wednesday, May 2, 2018. Whitbread is betting that its faster-growing Costa Coffee chain will compete more effectively against the likes of Starbucks Corp. once separated from the company's hotel business. Photographer: Chris Ratcliffe/Bloomberg
INTERNATIONAL - Coca-Cola Co. agreed to buy U.K. coffee-shop leader Costa for 3.9 billion pounds ($5.1 billion) in its biggest acquisition in eight years, pushing the soda pioneer into the fiercely competitive java market.

Whitbread Plc agreed to sell Costa Coffee Ltd., which operates more than 3,800 stores in 32 countries, rather than go ahead with a plan announced in April to spin it off as an independent company. Whitbread shares soared the most in 19 years as analysts said the business fetched a surprisingly high price.

Coke’s annual sales have been in decline since 2012. The Atlanta-based company is entering the coffee-shop market to make up for waning soft-drink demand, even as competitors such as Starbucks Corp. and JAB have already cornered many key locations.

“Hot beverages is one of the few remaining segments of the total beverage landscape where Coca-Cola does not have a global brand,” Chief Executive Officer James Quincey said in the statement.

Makers of soft drinks are branching out as consumers seek alternatives to sugary sodas. Earlier this month, PepsiCo Inc. agreed to pay $3.2 billion for SodaStream Ltd., which makes carbonated-water dispensers. The Costa purchase is Coca-Cola’s biggest push into operating stores, just as weak consumption in the U.K. leads a series of retailers such as BHS out of business.

Shares Leap

Whitbread shares rose as much as 19 percent. Whitbread said in April that it would spin off Costa as an independent publicly traded company, turning its focus to its Premier Inn hotel operations under pressure from activist investors.

Coca-Cola’s first overture came in June, Whitbread CEO Alison Brittain said on a call with journalists. “It’s been a very fast transaction,” she said. The spinoff would have taken as long as two years, the company had said.

The sale will yield a “substantial premium” to the value that would have been created through a spinoff, Whitbread said, adding it will return most of the proceeds to its shareholders.

Whitbread bought Costa in 1995 for 19 million pounds. At the time, it had 39 shops.

After missing out on the heady growth phase of coffee shops, Coca-Cola is entering when the market in countries like the U.K. and the U.S. is crowded. Earlier this year, the British newspaper the Guardian ran a story titled “Have we reached peak Costa Coffee?”

Costa’s like-for-like sales in the U.K. dropped 2 percent in the company’s first quarter as the retail market weakened. Consumers in the U.K. are reducing spending due to inflation and concern that Brexit may hurt the economy.

Still, Costa outranks Starbucks in the U.K. -- it also operates a business of 8,000 self-service machines -- and is expanding in markets such as China.

Acquisition Sprees
Costa was one of the few big coffee chains up for sale after Nestle SA and the Reimann family’s investment company JAB both went on acquisition sprees in the segment.

Nestle joined the trend of coffee giants taking aim at smaller niche producers, buying Blue Bottle Coffee and Chameleon Cold Brew. The Swiss food company also paid $7.2 billion to form an alliance with Starbucks that sells products in grocery stores.

JAB added the U.K.-based food-and-coffee chain Pret A Manger in a $2 billion deal earlier this year, following its past acquisitions of high-end coffee brands Peet’s and Stumptown. And in another union of the java and soft-drink worlds, JAB’s Keurig Green Mountain Inc. this year bought Dr Pepper Snapple Group for $18.7 billion.

Italian coffee maker Illycaffe SpA has attracted interest from suitors including JAB and Nestle, but the family owners have so far rebuffed approaches, according to people familiar with the matter.

Coke sells coffee under the Georgia brand in Japan and has some other local products for specific markets.

Bankers from Rothschild advised Coke, while Whitbread used Goldman Sachs, Morgan Stanley and Deutsche Bank AG.

- BLOOMBERG