BREAKINGVIEWS-Coke’s congealed coffee sale mars CEO departure

By Sebastian Pellejero

NEW YORK, Jan 14 (Reuters Breakingviews) - Coca-Cola's KO.N failed attempt to sell Costa Coffee leaves an awkward aftertaste. The shelved exit, reported by the Financial Times on Tuesday, draws a line under a diversification bet that never delivered and lands uncomfortably at the close of CEO James Quincey's tenure. His eight years in charge favored mostly sticking close to soda. That strategy preserved profit but left shares trailing the broader market. As sugar becomes harder to sell and diversification fails to deliver, the company's margin for error is shrinking.

The aborted auction is a manageable disappointment for Coke's accountants. The company paid 3.9 billion pounds ($5.24 billion) for the UK chain in 2018 and was seeking about 2 billion pounds according to the Financial Times. Even a full writedown would be modest relative to more than $16 billion in expected operating profit next fiscal year, according to Visible Alpha. What lingers is the drag on capital returns.

That problem is now hitting the company square in the belly. Coca-Cola's core soda business faces more sustained pressure as weight-loss drugs dent appetites and Washington's health push keeps sugar in regulators' sights. Raising prices on loyal drinkers can slow the impact, but not remove it. Monster Beverage MNST.O, the company's biggest soda hedge, now faces a surge in competition from fast-growing rivals such as Celsius CELH.O. With coffee failing to offer useful diversification, the portfolio remains heavily geared toward defending legacy franchises.

Markets have recognized that middle ground of strong profit but stagnating demand. Since announcing the Costa deal in August 2018, Coke has delivered about 101% in total shareholder return, according to LSEG. That's comfortably ahead of rivals PepsiCo PEP.O and Keurig Dr Pepper KDP.O, but well short of the S&P 500 Index .SPX at roughly 170%. Shares trade at around 22-times next year's expected earnings, a premium to soda staples, but below stocks tied to faster-growing categories such as energy drinks and coconut water.

The timing, then, is awkward. The Costa deal was struck not too long after Quincey took the helm in May 2017. Its quiet denouement comes as he prepares for his handover of the chief executive role and move to executive chairman in March. His tenure increasingly reads as an exercise in monetizing stagnation.

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CONTEXT NEWS

Coca-Cola has ditched plans to sell Costa Coffee after bids from private equity suitors fell short of its expectations, the Financial Times reported on January 13. Previous stories from the Financial Times stated Coke had been seeking about 2 billion pounds, nearly half of what it paid to acquire the UK's largest coffee shop chain in 2018.