2/25/2010
By David Silver, Research Analyst

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Last night (February 24), the Coca-Cola Company (KO) announced that it is closing in on a deal to acquire the North American operations of its largest bottler, Coca-Cola Enterprises (CCE).  This type of move may sound familiar, as main rival PepsiCo (PEP) is in the midst of completing a takeover of two of its largest bottlers, Pepsi Bottling Group (PBG) and PepsiAmericas (PAS).  Under the terms of the cashless deal, Coke would give up its 34% stake in Coca-Cola Enterprises Inc., worth approximately $3.4 billion, and assume $8.88 billion in debt. Coca-Cola will also sell the Norwegian and Swedish operations to Coca-Cola Enterprises for $822 million. The deal wouldn't be a complete takeover of CCE, as some of Coke's bottlers in Europe would be transferred over to CCE in a swap type transaction.  The Coca-Cola Company has acquired troubled bottlers around the world, and after improving operations and effectively turning operations around, it then sells those operations to its vast network of global bottlers.

It is an interesting shift in policy for the Coca-Cola Company, which as of a few months ago at its analysts meeting in Atlanta had specifically voiced opposition to acquiring any of its bottlers.  CEO Muhtar Kent had been quite convincing in his support for the bottlers' CEOs that were in attendance.  However, this morning, he says "We have a strong and unrelenting belief in our unique and thriving global bottling system. Our new North American structure will create an unparalleled combination of businesses,"

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.  Coke has really turned its operations around over the past few years, and today's move could further increase its profits and could trigger a shift in operations worldwide. However, bottling and distribution are a high cost and high investment business, albeit with a steady stream of profits. 

In the long run, this should be a good purchase for the Coca-Cola Company, but in the short term it will add another $9 billion of debt to its balance sheet.  The Company already has $5.1 billion of debt and $9.2 billion of cash, and it could hurt the Company over the next few quarters (higher interest costs and lower cash flows), but in the end, it will be a benefit for the Company.

David Silver
Wall Street Strategies