Coca-Cola In Talks To Buy Coca-Cola Enterprises

[Parsad]

Looks like Coke is trying to buy Coca-Cola Enterprises for $15B, and bringing one of their largest bottlers in-house.  Cheers!

 

http://www.bloomberg.com/apps/news?pid=20601087&sid=aJ8OuHXJNQbs&pos=2

[Cardboard]

Coca-Cola appears to be in catch-up mode relative to the industry where Dr.Pepper Snapple Group was already under the integrated model owning its main bottlers and after Pepsico announced the buyout of Pepsi Bottling Group and Pepsi Americas last fall.

 

DPS is likely to cash in another $1 billion following this change of control at CCE North America and it will increase earnings a bit. They did beat analysts this morning and 2010 guidance is also above what was thought. This transaction along with debt reduction/share repurchases should move earnings to around $2.60, so it is still a cheap stock. I am very impressed by management so far and you always have the possibility of a take-over by either PEP or KO.

 

Cardboard

[rmitz]

Coca-Cola appears to be in catch-up mode relative to the industry where Dr.Pepper Snapple Group was already under the integrated model owning its main bottlers and after Pepsico announced the buyout of Pepsi Bottling Group and Pepsi Americas last fall.

 

DPS is likely to cash in another $1 billion following this change of control at CCE North America and it will increase earnings a bit. They did beat analysts this morning and 2010 guidance is also above what was thought. This transaction along with debt reduction/share repurchases should move earnings to around $2.60, so it is still a cheap stock. I am very impressed by management so far and you always have the possibility of a take-over by either PEP or KO.

 

Cardboard

 

Does anyone else think it's odd that Coca-cola and Pepsi would have gone to all the trouble to spin off their bottlers years ago, and now buy them back?  They spun them off, I believe, to become a higher ROIC business.  So either they see depressed values that they want to take advantage of, maybe contracts have timed out since they were in house so that costs are being raised by the bottlers, or they just don't see other good investments. [All this should be considered pure speculation; I haven't read anything specific].

[Cardboard]

This article does a decent job explaining why they are doing this.

 

http://www.marketwatch.com/story/bottler-acquisition-could-be-risky-for-coke-2010-02-25?siteid=yhoof

 

Cardboard

[Rabbitisrich]

I confess that I don't understand the value of reintegrating bottling operations. I remember being confused by the Pepsi transaction as well. Nooyi offered almost $8 billion for the bottlers, but then she said that she only expected $300 million in cost reductions. She also noted something about being more flexible with their ability to introduce new products. In other words, there is probably some friction between bottlers and syrup makers that I am not savvy on, but which apparently justifies these lofty prices.

[mpauls]

Keep Digging guy's.  I recently got interested in this transaction, but I have no satisfactory explanation for this.  No trace in either TCCC or CCE's reports.  I wonder about Euro competition issues.  Also there was comment about much higher cost of debt for CCE, which TCCC would obviously finance for much less.  That said, doesn't look like there is any difficulty in making these payments.  There has to be a very clear answer, but I am yet to come up with or hear anything close. 

 

Keep throwing some ideas out there to stimulate ideas and discussion.

[mpauls]

Every time they have to negotiate one of their new products with their bottlers, they end up with all this friction in the supply chain."

 

Distilling the fundamental conflict between manufacturer and bottler, he explained that "bottlers want syrup prices lower and finished-product prices higher, while Coke wants the opposite, so they keep arguing with their bottlers."

[Grenville]

The best writeup I have seen on the merger.

 

http://streetcapitalist.com/2010/02/26/the-coca-cola-company-to-buy-coca-cola-enterprises-vertical-integration-continues/

 

 

During the Q&A session discussing the merger, Muhtar alludes to one of the reasons why the deal makes sense. He explains how part of their beverage distribution is managed in house and their carbonated drinks are managed by CCE. In addition to having control, it doesn't make much sense having two bottlers, one in house and one externally managed, when one would be a lot simpler and nimbler given beverage trends.

[mpauls]

... it doesn't make much sense having two bottlers, one in house and one externally managed, when one would be a lot simpler and nimbler given beverage trends.

 

Then why keep the US/Canada distribution?

[Grenville]

... it doesn't make much sense having two bottlers, one in house and one externally managed, when one would be a lot simpler and nimbler given beverage trends.

 

Then why keep the US/Canada distribution?

 

Not sure if I understand your question.

 

Let me clarify my post a bit. Currently in North America, Coca Cola is responsible for the production of hotfill and still beverages while the bottlers are responsible for the production of coldfill and sparkling beverages. This arrangement is unique to North America and does not similarly exist in the rest of the world. One goal of the transaction as explained by Muhtar Kent is to structurally simplify this arrangement that is unique to North America and doesn't not exist elsewhere.

 

Muhtar Kent explains this reason at 1:22:00/1:44:09 of the conference call linked below in response to a question from Goldman Sachs on the reasoning for the deal.

http://webcastingplayer.corporate-ir.net/player/playerHOST.aspx?c=94566&EventId=2773232&StreamId=1449814&TIK={eb5ba08a-0b3e-4269-9f80-36d0298f4b9a}&RGS=3&IndexId=

 

The link points to the conference call discussing the transaction. I encourage you to listen to that question and response as it is the source of my understanding.

[mpauls]

I listened to the call the other day, but I skipped through.  Let's ignore specifics for simplicity and to get a clear picture of the transaction separate from from strategic intention.  As I understand, CCE currently owns rights to KO's US bottling distribution.  KO controls several international bottlers.  KO owns 37% of CCE.

 

The transaction:

 

In exchange for KO's 37% and two (NOR and SWE) or so European bottlers, KO takes ownership and consolidates CCE's US bottlers. 

KO is effectively severing several controlling interests of European Bottling businesses.  Given CCE's option to acquire the German bottling operation, it appears as though they want to separate the European bottling business completely.  There was some anti-trust study by the European Union on Coca-Cola in 2006-a prelim investigation for which I found no follow up, but honestly didn't dig too deeply. 

 

 

P.s.  "Muhtar Kent explains this reason at 1:22:00/1:44:09"

 

The stream that I access is only 1:03.

 

 

[Grenville]

 

P.s.  "Muhtar Kent explains this reason at 1:22:00/1:44:09"

 

The stream that I access is only 1:03.

 

 

So the stream starts at 40:00 for me and ends at the 1:44:09 mark so about the same rough time of 1:03:00 in total. You can reach the same point by just going back 22 minutes from the end of the call.

[mpauls]

Not much in the talk.

[mpauls]

Buffett doesn't slip, but you can tell he isn't too fond of the deal.    Even worse, he cut me off a long time ago and simply won't teach me anything new.

[twacowfca]

Buffett doesn't slip, but you can tell he isn't too fond of the deal.    Even worse, he cut me off a long time ago and simply won't teach me anything new.

 

 

What do you mean, "cut me off"?

[mpauls]

Sorry, unintended implication. Meant simply that there is a limit to the knowledge he's willing to share and he reached that limit long ago. 

 

[Grenville]

Herb Allen just purchased over $8m worth of stock in the open market.  Barry Diller has similarly purchased $48m worth of the stock in the open market this last year.... 

 

Hi Valuegeek,

 

Where did you find those transactions? Could you post the link?

 

Thanks!

[Grenville]

The Herb Allen one just hit the tape....  I attached a copy of the Form 4 that I copy/pasted from BBERG

 

Barry Diller filed Form 4s on 10/26/2009 and 3/2/09...

 

Hope that helps.     

 

 

 

Thanks, just what I was looking for!

 

I forgot to change the radio button to include ownership info when I searched on the SEC.GOV site.

 

-G