March 15, 2010

Coke Near Deal for Bottler Total Value May Exceed $12 Billion; Strategic Shift Driven by New Consumer Tastes

Filed under: Uncategorized — ktetaichinh @ 9:10 pm
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In a strategic about-face driven by big changes in consumer tastes, Coca-Cola Co. was nearing a deal late Wednesday to buy the bulk of its largest bottler, according to people familiar with the matter.

As part of the deal, Coke would buy Coca-Cola Enterprises Inc.’s North American operations, the people said. The rest of the bottler, which consists of operations in several European countries, would remain independent and acquire Coke bottling operations in Scandinavia and Germany.

While exact terms of the transaction could not be learned late Wednesday, the deal’s value could be approximately $12 billion to $13 billion, including equity and assumed debt, said one person familiar with the matter.

A Coke deal would mark a major change in the strategy the company has pursued for decades—setting up large, independent bottlers run separately from Atlanta-based Coke itself. It would also come as PepsiCo is about to close acquisitions of its two largest independent bottlers, putting pressure on Coke to make a similar move to gain the same competitive advantages PepsiCo stands to reap. The anchor bottler strategy worked well for Coke in the 1980s and 1990s when consumers were drinking increasingly more soda that was shipped in high volumes.

But since then, the interests of Coke and its bottlers have diverged, as the drinks giant seeks to adapt to consumers moving away from soft drinks to more niche, noncarbonated offerings. Owning a bottler would give Coke flexibility. It could decide to distribute through its bottling system, through which products are delivered directly to stores. Or it could deliver drinks through warehouses, which is cheaper and preferable for products too small or not profitable enough to distribute cost effectively through the more expensive “direct store delivery” system.

For Coke’s everyday consumers, the deal potentially could mean lower prices, with some costs of distribution eliminated, and a wider variety of drinks, including niche products, in stores as the company gains greater distribution flexibility, according to industry experts.

Any deal could prove risky. A marketing and branding company, Coke could be distracted by taking on bottling drinks in a huge market. The net effect on its balance sheet is unclear: It would not only absorb bottling assets, but also potentially spin off others that it currently owns in Scandinavia and Germany as part of the deal. Coke owns several of its bottlers around the world, also including bottlers in Brazil, India and China.

PepsiCo announced last April that it aimed to subsume Pepsi Bottling Group Inc. and PepsiAmericas Inc. Pepsi said the $7.8 billion deal will allow it to have greater control over development, distribution and marketing of new products with the acquisitions, which are expected to close Friday.

Owning its bottlers allows PepsiCo to negotiate alone with retailers, rather than sharing that task with representatives of separately publicly traded bottlers.

The boards of both Coke and CCE were expected to meet Wednesday evening to approve the transaction. It is still possible the deal could be revised or fall apart at the last moment, said the people familiar with the matter. A Coke spokesman declined to comment. A CCE representative did not immediately respond to requests for comment.

CCE represents 16% of Coke’s volume world-wide and is the primary bottler for the U.S. and Canada. Last year, the North American operations accounted for 70% of CCE’s net operating revenues, with the remainder coming from Europe.

In Europe, the company’s territories include Belgium, continental France, the U.K., Luxembourg, Monaco and the Netherlands. The deal under consideration would likely keep these operations inside a publicly traded CCE, with Coke swapping some of its own European bottlers into the company.

Shares of Coke were little changed in 4 p.m. trading Wednesday on the New York Stock Exchange at $55.16. CCE stock fell less than 1% to $19.18 on the Big Board, giving it a market value of $9.4 billion. In after-hours trading, CCE shares jumped 25% on the news.

After setbacks earlier in the decade, Coke’s sales have recovered globally in recent years under former Chairman and CEO E. Neville Isdell, who retired last April, and current Chairman and CEO Muhtar Kent. Its stock is up 40% since sinking to $39.15 in October 2004. CCE’s stock is about where it was in October 2004, though it has recovered after hitting close to $8 in November 2008.

For Coke, the deal would represent a partial reversal of a strategy it pioneered in the mid-1980s. Worried about losing control over its disparate bottlers, Coca-Cola’s chief financial officer at the time, M. Douglas Ivester, forged a plan to create big, publicly traded “anchor bottlers” such as CCE in which it would own a large stake—up to 49%—while keeping the bottlers’ assets off its books.

CCE went public in 1986. Coke remains its largest shareholder, with a 34% stake as of the end of last year.

That bottling system allowed Coke to build a network of anchor bottlers around the globe, maintain a powerful influence with large stakes, and generate an additional profit stream by buying up small bottlers and then selling them to the new anchor bottlers. But by the late 1990s, some of the big bottlers also became a problem for Coke, saddled with debt from acquiring small bottlers and new equipment.

Broader changes in consumer habits have also put pressure on the bottling system in the U.S., which was traditionally geared toward manufacturing and selling carbonated soft drinks rather than the types of drinks that are growing faster these days, like “enhanced water,” or bottled water with vitamins and flavors.

When PepsiCo Chairman and CEO Indra Nooyi launched that company’s similar move in April, she said owning the two bottlers would give it the flexibility to decide how its beverages should be distributed. As the industry moves from a heavy reliance on carbonated soft drinks into water, juice, teas and other noncarbonated drinks, some soft-drink bottlers don’t have the equipment to manufacture the noncarbonated drinks and many are sold in small volumes. “We can accelerate revenue growth and be more agile and flexible,” Ms. Nooyi said at the time.

PepsiCo has said it expects to save $400 million by 2012 from the deals. But Bill Pecoriello, chief executive of ConsumerEdge Research LLC, believes the company may actually reap more than $600 million.

PepsiCo hasn’t yet laid out specific changes it plans to the way it delivers its drinks. But according to Mr. Pecoriello, the company is likely to move some of the distribution of its Gatorade sports drink from an outside operator to its bottling system, which will save it money.

Since PepsiCo announced its plan to acquire Pepsi Bottling Group Inc. and PepsiAmericas Inc., Mr. Kent, the Coke CEO, has staunchly defended Coke’s system of maintaining independent bottlers, calling it “still the best way to win in the marketplace.”

Write to Dana Cimilluca at, Betsy McKay at and Jeffrey McCracken at


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