Coke: Potential Beverage/Bottler Merger Hits the Spot -- Barron's

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Welcome Back, Bottler by Andrew Bary

Highlighted companies: Coca-Cola Co. (KO), Coca-Cola Enterprises Inc. (CCE), Cadbury Schweppes plc (CSG), Pepsico Inc. (PEP), Pepsi Bottling Group Inc. (PBG)
Summary: Bill Pecoriello, Morgan Stanley beverage analyst, says the probability of Coca-Cola Co. (KO) buying out bottler Coca-Cola Enterprises Inc. (CCE) is growing. Coke's core business is producing concentrate, such as Coca-Cola Classic, which it sells to bottlers who bottle and sell it to consumers. Since Coke's revenue comes from concentrate sales, it favors lower prices and higher sales volume. CCE, conversely, faces pressure to raise beverage prices to recoup costs on corn-syrup, cans, bottles, and other inputs. By owning its primary bottler (CCE accounts for 75% of KO's domestic sales), Coke could develop pricing and marketing strategies without regard for the impact on another company. And Coke is unhappy that CCE is actively pursuing contracts with competitors, such as last week's deal with Arizona Iced-Tea, which competes with Coke's Nestea. With a market cap over $100b, Coca-Cola could easily absorb CCE now valued at $9.5b, with about $10 billion of debt. The problem with Pecoriello's case, says Barron's, is that Coca-Cola has shown no interest in buying CCE -- a company it originally spun off in 1986 to the applause of Wall Street, who saw it allowing Coke to focus on its core business and get out of low-margin capital-intensive bottling. But, "deal or no deal, CCE looks reasonable," at 16x earnings vs. 17x for rival Pepsi Bottling Group Inc. (PBG) and 20x for both Coca-Cola and Pepsico Inc. (PEP). Europe is critical for Coke: 14% of its sales and 28% of its profits come from the EU; North America accounts for 29% of Coke sales but just 20% of profits. Buying CCE would allow Coke to create a giant Western European bottler from Coca-Cola Enterprises' operations in the U.K., France and Holland and Coke's bottlers in Germany and Nordic countries. Barron's Bottom Line: "A deal could bring CCE $27 a share (current price $20)... while helping Coca-Cola to carry out a cohesive growth strategy."
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