Commercial Awareness Update - August 2018

[Coralin96]

(I can't believe it's already August!)

For those of you applying for training contracts for the 31 July deadline, I hope it all went okay!

In the meantime, I thought I'd start writing up some stories for the week. Everyone is welcome to contribute any links/updates of your own if you want to.

Here is the first one:

Global interest rates
​

The story: The Federal Reserve kept its interest rate unchanged. It noted that economic activity is rising at a strong rate, with low unemployment rates and strong business spending growth.

Japan’s central bank also pledged to keep interest rates “extremely low” for an extended period and to keep buying bonds under its big stimulus programme.

Meanwhile, the UK central bank, the Bank of England, raised interest rates by 0.25% to 0.75%. This is the second time interest rates have risen since 2007 and it’s now at its highest level since the financial crisis.

Impact on businesses and law firms:

The decision to raise interest rates follows faster rises in prices and wages than had been expected. Interest rates have been very low for a long time, and the decision follows a rising inflation rate which is above the target rate of 2%.

Some business groups criticised the decision to raise rates, especially as the UK is still suffering from significant uncertainty over Brexit, which will be a shock to business and consumer confidence on its own.

Rising interest rates could lead to less spending, as businesses and millions of consumers face higher costs on existing loans, and may be hesitant to take out more expensive mortgages and other loans.

But on the other hand, financial markets and investors were well prepared for the decision (which is why the pound didn’t rise by much). Savings banks will do well as consumers save more to take advantage of the higher rates and commercial banks will make more money on their loans.

 

[Coralin96]

Technology companies reverse trajectory​

The story: Twitter’s share price fell by 14% as the company announced a 1m fall in monthly active users in the second quarter results, compared to the previous quarter.

This comes a day after Facebook suffered one of its biggest losses in US corporate history - where over $119bn was wiped off Facebook’s market capitalisation and Mark Zuckerberg personally lose over $15bn in one day – after the company announced its user growth rose at its slowest rate in two years.

A few weeks ago, Netflix’s stock had also fallen by 14% as it reported a fall in new subscribers.

These results compare to Apple, where strong iPhone sales led to a sharp jump in its third quarter earnings, making Apple the first US company with a market cap of over $1 trillion.

Impact on businesses and law firms: In the past, technology companies were a driver of growth in the stock market. But recently, it has been a difficult time for popular technology stocks, especially social media platforms, which has caused investors to reassess the growth prospects of these companies. Investors fear regulatory control, which would damage the ability of these companies to monetise their platforms.

Companies will increasingly lean on lawyers to ensure they are not breaching data or privacy legislation. At an early stage, this means drafting terms and conditions and privacy policies. It will also mean monitoring company activities to assess how these companies are obtaining and storing personal information, and ensuring contracts have appropriate security and consent provisions.

 

[Coralin96]

No deal v bad deal Brexit
​

Ministers have suggested we may leave the EU without a deal. This follows push back from the EU after Theresa May announced Britain's negotiating plan last month.

Impact on businesses and law firms

The impact of a 'no-deal Brexit' could include:

• Britain has the benefit of EU trade deals with over 50 countries. In the event of a no deal Brexit, businesses based in the UK would lose revenue as they struggle to sell their goods and services to international buyers, without expensive trade terms.

• If Britain leaves the EU without a deal, 2.8 million EU citizens could lose guaranteed rights to remain living in the UK, and 1.2 million UK citizens could lose their rights to remain living in other EU countries. British businesses would also suffer without easy access to European talent, which may prompt them to move into the EU.

• An IMF study recently estimates the five year effect of a no-deal Brexit would be a fall in growth by 4%, compared to no Brexit.

• Many British businesses use the EU for their factories and production. In the event of a 'no-deal Brexit", these businesses would struggle with disruptions to their supply chains. They would need the help of advisers including law firms, to restructure. It would also be expensive to find non-EU alternatives to buy their goods from, and sell their goods to.

• There would be new regulatory challenges when it comes to transactions in the EU. Whether it’s an acquisition or the sale of medicines, companies would have to make sure they are compliant with EU laws. For example, according to The Economist, “Britain’s car industry employs 800,000 people and exports 80% of its output”. As a sector dependent on international trade, these companies would face high costs, challenges to hiring workers, new tariffs and a loss of EU certification for their vehicles.

• Likewise, the UK would need to consider creating bodies to replace EU agencies, like the European Medicine Agency and the European Aviation Safety Agency. And they would need a new system with the EU in relation to security cooperation and the European Arrest Warrant.

• Banks would suffer from their inability to “passport” into the EU, which means they would be unable to export their financial services to EU customers, without regulatory barriers. To continue selling their services to EU clients, they will need to consider establishing subsidiaries within the EU, or they could apply for a licence.

• Contracts between UK and EU financial services firms, and other companies, could collapse, leaving businesses with high costs and uncertainty when it comes to doing business or investing in the EU.

 

[Coralin96]

Banks preparing for Brexit​

The Story:

Bank of America has plans to move a small number of research analysts from London to Paris.

Impact on business and law firms

As I've said before, financial firms are concerned they will lose the ability to export to EU clients after Brexit, because of the loss of passporting rights. One way to solve this is to relocate to within the EU, which means moving staff from London to an EU office

Quick facts

• Up to 4,000 job moves have been announced, including up to 1,000 from HSBC alone.
• JP Morgan, Morgan Stanley, Citi, Goldman Sachs, and other banks, have announced plans to move to Frankfurt, which has gained a lot of financial business since Brexit was announced.
• In addition to Frankfurt, Paris has been vying to attract financial business. Paris won a big point back in 2017 when the European Banking Authority, EU's main bank regulator, chose to relocate from London to Paris.

Brexit puts lawyers in London under a lot of uncertainty. Banks provide a lot of work for commercial law firms and if they move, law firms may have to follow. They also need to consider how the exit from the European Union will impact their clients.

In response, some law firms are increasing their presence in Brussels, including Slaughter and May and Macfarlanes. Others have established trade teams - like Linklaters and Clifford Chance. We will soon find out how disastrous Brexit will be for clients and their lawyers.

For more information on how lawyers can help during Brexit, I found this very useful page when researching this post! https://www.linklaters.com/en/insig...ow-can-linklaters-help-you-prepare-for-brexit

 

[Jaxkw]

Banks preparing for Brexit​

The Story:

Bank of America has plans to move a small number of research analysts from London to Paris.

Impact on business and law firms

As I've said before, financial firms are concerned they will lose the ability to export to EU clients after Brexit, because of the loss of passporting rights. One way to solve this is to relocate to within the EU, which means moving staff from London to an EU office

Quick facts

• Up to 4,000 job moves have been announced, including up to 1,000 from HSBC alone.
• JP Morgan, Morgan Stanley, Citi, Goldman Sachs, and other banks, have announced plans to move to Frankfurt, which has gained a lot of financial business since Brexit was announced.
• In addition to Frankfurt, Paris has been vying to attract financial business. Paris won a big point back in 2017 when the European Banking Authority, EU's main bank regulator, chose to relocate from London to Paris.

Brexit puts lawyers in London under a lot of uncertainty. Banks provide a lot of work for commercial law firms and if they move, law firms may have to follow. They also need to consider how the exit from the European Union will impact their clients.

In response, some law firms are increasing their presence in Brussels, including Slaughter and May and Macfarlanes. Others have established trade teams - like Linklaters and Clifford Chance. We will soon find out how disastrous Brexit will be for clients and their lawyers.

For more information on how lawyers can help during Brexit, I found this very useful page when researching this post! https://www.linklaters.com/en/insig...ow-can-linklaters-help-you-prepare-for-brexit

The story I'm preparing for TC interviews is based on Brexit, so your posts (especially the last two) have been so helpful. Thank you!

 

[Coralin96]

The story I'm preparing for TC interviews is based on Brexit, so your posts (especially the last two) have been so helpful. Thank you!

You're welcome There's just so much to cover on Brexit - and it always seems to be changing, so I've mostly left it alone until now. I think as we get closer to Brexit actually happen, they'll be more concrete stories to use!

 

[Coralin96]

Commercial Awareness Update 8th-9th August
Saudi Arabia v Canada

The timeline:

• The story starts when Saudi Badawi, a Saudi women's rights activist, was arrested.
• Canada's foreign minister made a tweet, calling for her release.
• In response, Saudi Arabia:
  • expels Canadian diplomats
  • recalls a student exchange programme
  • freezes new trade and investment with Canada
  • ends medical treatment programmes in Canada
  • suspends airlines flights to Canada
  • suspends investment in Canada

Impact on businesses and law firms

Many countries do a lot of trade with Saudi Arabia from oil to cars and aircraft parts. But they are dealing with a country guilty of many atrocities, and this story shines light on the political dimensions of international trade.

Saudi Arabia's reaction demonstrates it does not take international criticism lightly. As Saudi Arabia tries to modernise its economy, it will need to consider how its actions affect foreign investors.

 

[Coralin96]

Commercial Awareness Update 6-10 August

I found this story from the latest edition of The Economist, which I've tried to explain below:

Elon Musk’s plans to take Tesla private
​

• On the 7th August, Elon Musk announced plans to take Tesla – the world’s leading manufacturer of electric cars – private.
• In Musk’s tweet, he claimed that he had enough money to buy out the company at $420 per share.
• If Musk takes Tesla private, he would need to raise enough money to buy its shares from investors, as it's currently listed on the NASDAQ, an American stock exchange.
• His tweet sent the markets into chaos, leading to Tesla’s shares on the stock exchange being suspended temporarily.

Impact

• If Musk follows through to take Tesla private, it would be the largest buyout in history:

• It would also allow Musk to run the company without having to be accountable to the public or to follow strict regulations for public companies.
• But Elon Musk’s tweet has already come under fire. He claimed funding had been secured, which sent the stock price up. But this could fall foul of American securities law, because companies are not allowed to use social media to mislead investors.
• Already, Elon Musk and Tesla has been sued twice, claiming his tweet was misleading, inflating Tesla’s stock price to the detriment of short sellers who bet that Tesla’s stock will fall.
• Musk may also likely face political intervention if he chooses to raise money from foreign sources, including China and Saudi Arabia.
• Lawyers will be involved to help take Tesla private. Musk has proposed a “special purpose fund” to help any existing shareholders keep their shares, which advisers will need to structure if it is compliant with legislation.

 

[Coralin96]

US national security regulations
​

The story

China has increasingly invested in sensitive US companies over the last decade, from self-driving cars to robotics and AI. These investments have sparked national security concerns, which has led to new US legislation to combat foreign investment in US companies.

Soon, the Foreign Investment Risk Review Modernisation Act or FIRRMA will be enacted into law in the US. FIRRMA will give America’s national security regulator, the Committee on Foreign Investment or CFIUS, new powers to review and block foreign transactions on national security grounds. These include a broad range of areas from investments in critical infrastructure to companies that supply sensitive personal data to real estate transactions.

Impact on businesses and law firms

US companies and foreign investors will need to do an assessment of FIRRMA to consider whether it will affect new investments. They may have to alter their foreign investments to ensure their investments are not blocked. And Chinese companies, in particular, may need to prepare for restrictions on their US investments.

Lawyers who understand CFIUS and the relevant regulation will be needed to advice companies on compliance. They may need to provide legal opinions to advise companies on whether a particular deal is likely to trigger a CFIUS review.

 

[Coralin96]

Next update:

Kweku Adoboli is being deported

The Story: Adoboli is the biggest rogue trader in British history. He began his fraudulent activities in 2008, working as a director in the equities division of UBS. He started using bank money to bet on the stock market and he falsified information so the bank couldn't see the risks he was taking. Adoboli did not hedge these transactions - a transaction that would offset the risk of his gambles - so he could achieve a higher profit.

By the time Adoboli came clean in 2011, he had caused a loss of $2.3bn for UBS. Jobs were cut, the CEO resigned and UBS's stock price dropped. He was later sentenced to seven years in prison.

While Adoboli has been released, he is not being deported to Ghana, despite having lived in the UK since the age of 12.

Impact on business and law firms

The deportation of Adoboli follows a UK law where foreign nationals are automatically subject to deportation if they are sentenced to over four years in prison. While his lawyer has argued that Adoboli "faces no threat to society" and has already paid for his crime, the Home Office sought to ensure Adoboli was deported. He will also be unable to return to the UK and possibly also Europe and North America.

This story shows that while this is a non violent crime, the government is sending a message that those who abuse the financial system will face punishment under the law. This stands in contrast to criticism it faced for not doing enough to punish bankers who engaged in risky activity during the financial crisis of 2008.

 

[Coralin96]

Another update

Turkey's struggle
​

The story:

Turkey has been battling a currency crisis as the Turkish Lira has been in decline for some time now. There are a number of reasons behind this, one of them being the government's policy against high interest rates, which has caused the Lira to lose value and prices to rise. Rising prices has turned away investors from buying the currency and existing investors have sold the Lira, causing the currency's value to fall even more.

Recently, the crisis escalated after Andrew Bruson, a pastor and American citizen was accused of terrorism and imprisoned by Turkey. Donald Trump responded to this by launching tariffs and economic sanctions against Turkey, which has reduced investor confidence in Turkey even further, causing the Lira to fall.

Impact on business and law firms

The Turkish Lira has lost a fifth of its value in August, which has raised the cost of Turkey's debts in foreign currencies.

Investors are concerned about whether Turkey can pay its international bonds. This has also fuelled fears of contagion, whereby Turkeys currency crisis and recession could spread to other nations.

As The Economist notes: the South African rand and the Indian rupee have fallen. Argentina has also been forced to raise interest rates.

Western governments - aside from Trump - are cautious with Turkey because they rely on the country to hold Syrian refugees. This conflict may also lead Turkey to become closer to Russia or China.

Lawyers will need to advise investors in Turkish bonds about the consequences of a default by Turkey. Companies that are exposed to Turkey will also need to consider alternative trade routes or opportunities to re-negotiate their contracts.

 

[Coralin96]

The fall of Bitcoin​

The story:

Since the beginning of 2018, the value of cryptocurrencies has been in a sharp decline. In January, the market capitalisation of cryptocurrencies was $800bn, but it has now fallen to $200bn, demonstrating a loss of market confidence in the digital currency.

Impact on business and law firms:

Investors have been drawn to cryptocurrencies and in particular, Bitcoin, which is the original and most valuable cryptocurrency. Advocates of the digital currency have said it will lead to a major financial revolution, as cryptocurrencies are not controlled by a company or government. The technology behind these cryptocurrencies, called blockchain allows financial trades to be quicker, at lower fees, and to be more widely available. They believe it will, one day, become the main form of currency.

The soaring price has led to a lot of startups raising money. Investors believing in the potential of the digital currency have invested in initial coin offerings, an unregulated way to raise money through cryptocurrencies, which has raised billions. Derivatives contracts have also been introduced recently, allowing investors to bet on the fall of the price of bitcoin, for the first time.

But people have been caught in the hype. That hype was unsustainable, pushing the prices higher and higher. Now, the hype has cooled. Cryptocurrencies haven't found much hope from US regulators, as they seek to open an exchange to trade bitcoin. Other countries, such as China, has banned initial coin offerings.

For law firms, this is an uncertain area as cryptocurrencies aren't regulated. Initial coin offerings lack the protection of laws that regulate companies when they want to raise money in the public markets. Start-ups looking to use blockchain technologies will need lawyers to make sure they don't fall foul of securities laws.

Law firms should still keep up to date with the state of cryptocurrencies. While cryptocurrencies may not have lived up to the hype, they could still enter the mainstream market.

Further information

Here's one of the best explanations I've read of cryptocurrencies: https://medium.freecodecamp.org/explain-bitcoin-like-im-five-73b4257ac833

 

[Coralin96]

Next update

The UK government has given advice on how to handle a no deal Brexit, I thought I'd summarise some of the major consequences.

What are the consequences of a no-deal Brexit?

• Trade with the EU would fall back to World Trade Organisation rules, which means British businesses trying to sell in the EU would need to meet additional requirements, such as licences and safety declarations. The cost may lead to these businesses charging higher prices.
• The Treasury predicts a no deal Brexit would, over the next 15 years, lead GDP to fall by 7.7%.
• Smaller companies would struggle because they lack the finances to hire advisers to prepare for the new checks.
• The UK will not be protected by the EU's ban on credit card surcharges, which is likely to lead to extra chrages for British citizens visiting the EU.

Impact on businesses

• European companies can continue to access London's financial services for three years after Brexit under the temporary transition deal.
• But financial services companies are still waiting on the EU to determine what the future relationship will be. They currently rely on passporting - which means firms authorised in the UK can trade in the EU - but this now seems out of the picture.
• European companies need to know what will happen to cross-border contracts with UK companies.
• Companies will need legal advice to put in place their contingency plans, whether that means relocating outside of the UK, or preparing for additional regulatory checks when they trade with the EU.

Impact on law firms

• The Law Society has said that a no deal Brexit would lead to the UK legal sector facing a loss of 12,000 jobs and a fall of £3bn in revenue by 2025.
• A hard Brexit is expected to cause a slowdown in economic performance, leading to a fall in demand in legal services. This will in turn lead to job losses.
• The year after Brexit is however expected to be a busy time for law firms as clients look for regulatory advice.
• The Law Society notes that the job losses are also caused by new technology.
• Some law firms have started registering their lawyers in Ireland, including Eversheds Sutherland, the magic circle law firms, Latham & Watkins and more. This is so they can still practice EU law and therefore meet the needs of their clients.

 

[Coralin96]

The end of the world's largest initial public offering

The Story

• A report by Reuters last week said that Saudi Aramco, the world's largest oil company, has shelved plans to IPO.
• Saudi Arabia said it was untrue and that they were waiting for "optimum conditions".
• The IPO was supposed to raise money for Saudi Arabia to help it diversify its economy away from oil.
• There have already been struggles after Saudi Aramco could not decide whether to list in London or New York. Later, the Kingdom also said the company was worth $2trn, which left investors concerned over the company's transparency with its figures.
• In the meantime, Saudi Aramco is buying a 70% stake in Sabic, a large petrochemicals firm.

Impact on business and law firms

• Investors are already concerned about the legal implications of Saudi Aramco's New York listing.
• US law firm, White & Case is advising Saudi Aramco, and will need to prepare Saudi Aramco for the litigation suits which may affect its listing.
• Under US law, terrorism legislation allows families affected by 9/11 to sue Saudi Arabia.
• Saudi Aramco may also struggle to comply with onerous US regulations.
• If Saudi Aramco decides to choose to list in London instead, it will struggle to meet UK regulations which require a certain class of company to list 25% of its shares on the stock exchange. The oil company only wants to list 5%.

 

[Coralin96]

This will probably be my last commercial awareness update for August 2018!

Saudi Aramco loses unlimited rights to access Saudi Arabia's oil reserves

The Story

Saudi Arabia has reduced the length of time that its state-owned oil company, Saudi Aramco has guaranteed access to Saudi Arabia's vast oil and gas reserves.

Previously, the contract between the business and the government gave access to its reserves "in perpetuity". But now, Saudi Arabia has limited this to 40 years. And while Saudi Aramco has an option to renew access, it raises concerns about the relationship between the oil company and the government.

Impact on businesses and law firms

Saudi Aramco has already delayed its IPO, which was supposed to be the world's largest, as it looks to sell a 5% stake of its business to outside investors.

While Saudi Arabia has said it is committed to proceeding "when conditions are optimum", the change in contract terms suggests a struggle between the company and the government.

This does not bode well for Saudi Aramco who needs to instill confidence in investors before its IPO. The legal change to the contract shows the government reasserting its power over Saudi Aramco. Saudi Arabia had originally pushed for a 20 year agreement, but that would affect Saudi Aramco's IPO significantly, as it would have to reduce its stated reserves and future development - which would likely reduce its valuation.

Over the last few months, Saudi Aramco has been preparing for an IPO, having agreed a contract to change its financial reporting and complete an audit of its energy reserves. But it continues to face problems on its route to IPO, suggesting the company and the government may not be prepared for the consequences of an IPO.

 

[Jaxkw]

Big news today!

Coca Cola to buy Costa:

https://www.google.co.uk/amp/s/www.bbc.co.uk/news/amp/business-45365893

 

[Coralin96]

Big news today!

Coca Cola to buy Costa:

https://www.google.co.uk/amp/s/www.bbc.co.uk/news/amp/business-45365893

Good one!

I know I said the last post would my last update for August, but this story seems worth writing about!

Coca-Cola to buy the Costa Coffee chain for £3.9bn

The Story

In a £3.9bn deal, Coca-Cola, will be buying Costa Coffee from its buyer, hospitality group Whitbread plc. The decision caused Whitbread shares to rise by 18% after the deal was announced.

Impact on business and law firms

Costa is the second largest coffee shop in the globe, but competition in the UK market is fierce. Over the past year, coffee has been a major market for mergers and acquisitions. Nestle recently paid Starbucks $7.1bn to sell its coffee and purchased a stake in US coffee roaster Blue Bottle, while JAB Holdings acquired Keurig Green Mountain alongside other investors.

Whitbread owns both Costa and the hotel business, Premier Inn. But while Whitbread was keen to keep the two businesses together, citing savings, some disagreed. Activist investors have been pressuring UK leisure group, Whitbread to sell Costa for some time. The hedge funds Elliot Advisors and Sachem Head called for a sale process, which was publicly resisted by Whitbread.

Costa and Premier Inn, the two divisions of Whitbread already had separate legal entities and their own senior leadership teams. Until Coca Cola approached Whitman in June its plan was to undertake a demerger, spinning off the Costa business as a separate entity.

Other demergers in the past have included splitting TalkTalk from Carphone Warehouse and Dr Pepper Napple from Cadbury Schweppes. Lawyers would have got involved to help the Whitbread businesses restructure, separating IT and other functions, including a pensions team .

Whitbread will now have an opportunity to focus on its asset-heavy hotel business: Premier Inn. Costa had traditionally been the faster growing business of the two, but recently sales had slowed down, far below the 2% growth in Costa's 2017 tax year as consumer confidence fell . Premier Inn owns the freehold of about 3/5 of its hotels, a decision which Whitbread argues gives it better financing terms and flexibility. But many hotel operators have sold their freeholds to investors and Whitbread may now need to do the same as it loses the cash flow produced by Costa to fund its asset-heavy hotel business. Alternatively, Premier Inn could slow its growth, borrow more or invest the funds from this acquisition.

Most of the cash proceeds will be returned to shareholders, although £100m will be set aside for deal-related costs. Whitbread also said it will reduce debt and contribute to ites pension fund.

Whitbread first purchased Costa 23 years for £19m. Back then, Costa turned over £55m and had 39 shops. it was also a time when tea was the most popular hot drink in the UK. Over the next two decades, a growth in disposable incomes and a trend of breakfast-on-the-go led to a growth in coffee sales. Costa would later have 2,000 outlets with an estimated total revenue of over £9bn.

Before this deal was announced, Whitbread had a market capitalisation of £7.3bn, with Costa representing an estimated £2.3bn of that value. With this deal valuing Costa at 3.9bn, it shows that Coca Cola is paying a 20% premium on Costa's estimated value.

In recent years, Costa has aggressively opened up outlets. It has also turned its attention to China, a country with a tradition of tea-drinking, to offset falling high street sales in Britain. Costa had set a strategy for a third of its sales to come from overseas by 2020. Costa had also been in the process of putting its Costa Express machines into convenience stores and investing in IT such as for its click and collect coffee ordering

Coca Cola's acquisition reflects its CEO's appetite for less-conservative deals. In a statement, the CEO said hot drinks was "one of the few remaining segments of the total beverage landscape where Coca-Cola does not have a global brand".

Coca Cola had $35.4bn in revenues in 2017 and a market capitalisation of over $191bn. The company could use its existing supply chains, brand and global scale to grow Costa and compete against national and international rivals.

Subject to shareholder and regulatory approval, the deal is expected to close in the first half of 2019.

 

[jess889]

Good one!

I know I said the last post would my last update for August, but this story seems worth writing about!

Coca-Cola to buy the Costa Coffee chain for £3.9bn

The Story

In a £3.9bn deal, Coca-Cola, will be buying Costa Coffee from its buyer, hospitality group Whitbread plc. The decision caused Whitbread shares to rise by 18% after the deal was announced.

Impact on business and law firms

Costa is the second largest coffee shop in the globe, but competition in the UK market is fierce. Over the past year, coffee has been a major market for mergers and acquisitions. Nestle recently paid Starbucks $7.1bn to sell its coffee and purchased a stake in US coffee roaster Blue Bottle, while JAB Holdings acquired Keurig Green Mountain alongside other investors.

Whitbread owns both Costa and the hotel business, Premier Inn. But while Whitbread was keen to keep the two businesses together, citing savings, some disagreed. Activist investors have been pressuring UK leisure group, Whitbread to sell Costa for some time. The hedge funds Elliot Advisors and Sachem Head called for a sale process, which was publicly resisted by Whitbread.

Costa and Premier Inn, the two divisions of Whitbread already had separate legal entities and their own senior leadership teams. Until Coca Cola approached Whitman in Junem its plan was to undertake a demerger, spinning off the Costa business as a separate entity.

Other demergers in the past have included splitting TalkTalk from Carphone Warehouse and Dr Pepper Napple from Cadbury Schweppes. Lawyers would have got involved to help the Whitbread businesses restructure, separating IT and other functions, including a pensions team .

Whitbread will now have an opportunity to focus on its asset-heavy hotel business: Premier Inn. Costa had traditionally been the faster growing business of the two, but recently sales had slowed down, far below the 2% growth in Costa's 2017 tax year as consumer confidence fell . Premier Inn owns the freehold of about 3/5 of its hotels, a decision which Whitbread argues gives it better financing terms and flexibility. But many hotel operators have sold their freeholds to investors and Whitbread may now need to do the same as it loses the cash flow produced by Costa to fund its asset-heavy hotel business. Alternatively, Premier Inn could slow its growth, borrow more or invest the funds from this acquisition.

Most of the cash proceeds will be returned to shareholders, although £100m will be set aside for deal-related costs. Whitbread also said it will reduce debt and contribute to ites pension fund.

Whitbread first purchased Costa 23 years for £19m. Back then, Costa turned over £55m and had 39 shops. it was also a time when tea was the most popular hot drink in the UK. Over the next two decades, a growth in disposable incomes and a trend of breakfast-on-the-go led to a growth in coffee sales. Costa would later have 2,000 outlets with an estimated total revenue of over £9bn.

Before this deal was announced, Whitbread had a market capitalisation of £7.3bn, with Costa representing an estimated £2.3bn of that value. With this deal valuing Costa at 3.9bn, it shows that Coca Cola is paying a 20% premium on Costa's estimated value.

In recent years, Costa has aggressively opened up outlets. It has also turned its attention to China, a country with a tradition of tea-drinking, to offset falling high street sales in Britain. Costa had set a strategy for a third of its sales to come from overseas by 2020. Costa had also been in the process of putting its Costa Express machines into convenience stores and investing in IT such as for its click and collect coffee ordering

Coca Cola's acquisition reflects its CEO's appetite for less-conservative deals. In a statement, the CEO said hot drinks was "one of the few remaining segments of the total beverage landscape where Coca-Cola does not have a global brand".

Coca Cola had $35.4bn in revenues in 2017 and a market capitalisation of over $191bn. The company could use its existing supply chains, brand and global scale to grow Costa and compete against national and international rivals.

Subject to shareholder and regulatory approval, the deal is expected to close in the first half of 2019.

This is great!

I came across this infographic recently which is quite relevant!

 

[Salma]

Good one!

I know I said the last post would my last update for August, but this story seems worth writing about!

Coca-Cola to buy the Costa Coffee chain for £3.9bn

The Story

In a £3.9bn deal, Coca-Cola, will be buying Costa Coffee from its buyer, hospitality group Whitbread plc. The decision caused Whitbread shares to rise by 18% after the deal was announced.

Impact on business and law firms

Costa is the second largest coffee shop in the globe, but competition in the UK market is fierce. Over the past year, coffee has been a major market for mergers and acquisitions. Nestle recently paid Starbucks $7.1bn to sell its coffee and purchased a stake in US coffee roaster Blue Bottle, while JAB Holdings acquired Keurig Green Mountain alongside other investors.

Whitbread owns both Costa and the hotel business, Premier Inn. But while Whitbread was keen to keep the two businesses together, citing savings, some disagreed. Activist investors have been pressuring UK leisure group, Whitbread to sell Costa for some time. The hedge funds Elliot Advisors and Sachem Head called for a sale process, which was publicly resisted by Whitbread.

Costa and Premier Inn, the two divisions of Whitbread already had separate legal entities and their own senior leadership teams. Until Coca Cola approached Whitman in June its plan was to undertake a demerger, spinning off the Costa business as a separate entity.

Other demergers in the past have included splitting TalkTalk from Carphone Warehouse and Dr Pepper Napple from Cadbury Schweppes. Lawyers would have got involved to help the Whitbread businesses restructure, separating IT and other functions, including a pensions team .

Whitbread will now have an opportunity to focus on its asset-heavy hotel business: Premier Inn. Costa had traditionally been the faster growing business of the two, but recently sales had slowed down, far below the 2% growth in Costa's 2017 tax year as consumer confidence fell . Premier Inn owns the freehold of about 3/5 of its hotels, a decision which Whitbread argues gives it better financing terms and flexibility. But many hotel operators have sold their freeholds to investors and Whitbread may now need to do the same as it loses the cash flow produced by Costa to fund its asset-heavy hotel business. Alternatively, Premier Inn could slow its growth, borrow more or invest the funds from this acquisition.

Most of the cash proceeds will be returned to shareholders, although £100m will be set aside for deal-related costs. Whitbread also said it will reduce debt and contribute to ites pension fund.

Whitbread first purchased Costa 23 years for £19m. Back then, Costa turned over £55m and had 39 shops. it was also a time when tea was the most popular hot drink in the UK. Over the next two decades, a growth in disposable incomes and a trend of breakfast-on-the-go led to a growth in coffee sales. Costa would later have 2,000 outlets with an estimated total revenue of over £9bn.

Before this deal was announced, Whitbread had a market capitalisation of £7.3bn, with Costa representing an estimated £2.3bn of that value. With this deal valuing Costa at 3.9bn, it shows that Coca Cola is paying a 20% premium on Costa's estimated value.

In recent years, Costa has aggressively opened up outlets. It has also turned its attention to China, a country with a tradition of tea-drinking, to offset falling high street sales in Britain. Costa had set a strategy for a third of its sales to come from overseas by 2020. Costa had also been in the process of putting its Costa Express machines into convenience stores and investing in IT such as for its click and collect coffee ordering

Coca Cola's acquisition reflects its CEO's appetite for less-conservative deals. In a statement, the CEO said hot drinks was "one of the few remaining segments of the total beverage landscape where Coca-Cola does not have a global brand".

Coca Cola had $35.4bn in revenues in 2017 and a market capitalisation of over $191bn. The company could use its existing supply chains, brand and global scale to grow Costa and compete against national and international rivals.

Subject to shareholder and regulatory approval, the deal is expected to close in the first half of 2019.

Wow so informative!!!!!!! Thanks Coralin for every single detail!

 

[Coralin96]

This is great!

I came across this infographic recently which is quite relevant!

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Wow so informative!!!!!!! Thanks Coralin for every single detail!

Haha I went a bit overboard with this one !