CCE shareholders will get one share of a new Coca-Cola Enterprises company focused only on European bottling and will get a one-time $10-a-share payment. The company plans to issue debt to finance this payment and the European acquisition.
With the transaction, Coca-Cola chairman and CEO Muhtar Kent said the company was converting "passive capital into active capital." He added it would give Coca-Cola direct control over its investment in North America to accelerate growth.Coke will control about 90% of the bottling of its products in North America, said the report. It expects cost savings of $350 million over four years and that the acquisition will add to earnings per share by 2012.
The deals mark a major change in the strategy the company has pursued for decades, the report saidsetting up large, independent bottlers run separately from Atlanta-based Coca-Cola itself. It would also come as PepsiCo is about to close acquisitions of its two largest independent bottlers, putting pressure on Coca-Cola to make a similar move to gain the same competitive advantages PepsiCo stands to reap.The anchor bottler strategy worked well for Coca-Cola in the 1980s and 1990s when consumers were drinking increasingly more soda that was shipped in high volumes. But since then, the Journal said, the interests of Coca-Cola 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 Coca-Cola flexibility, the report said. 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 (DSD)system.
The deal could have implications for Dr. Pepper Snapple Group, said the report. CCE is a big distributor of the Dr. Pepper Snapple brand. PepsiCo, after announcing its bottler deals, said it would pay $900 million for the rights to sell many of the Dr. Pepper Snapple beverages bottled and distributed by Pepsi's two big bottlers. News of Thursday's deal prompted speculations of similar negotiations with Coca-Cola and even a possible payout for Dr. Pepper.
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 the newspaper, citing industry experts.
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.
CCE represents 16% of Coca-Cola's volume world-wide and is the primary bottler for theUnited Statesand Canada. Last year, the North American operations accounted for 70% of CCE's net operating revenues, with the remainder coming from Europe.
After setbacks earlier in the decade, Coca-Cola's sales have recovered globally in recent years under former chairman and CEO E. Neville Isdell, who retired last April, and current chairman, Kent.
For Coca-Cola, the deals would represent a partial reversal of a strategy it pioneered in the mid-1980s, said the report. 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 stakeup to 49%while keeping the bottlers' assets off its books.
That bottling system allowed Coca-Cola 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 Coca-Cola, 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 United States, 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 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 do nothave 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," Nooyi said at the time.
PepsiCo has said it expects to save $400 million by 2012 from the deals. But according to the report, Bill Pecoriello, CEOof ConsumerEdge Research LLC, said he believes the company may actually reap more than $600 million.
PepsiCo has not yet laid out specific changes it plans to the way it delivers its drinks. But according to 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 and PepsiAmericas, Kent, has staunchly defended Coca-Cola's system of maintaining independent bottlers, calling it "still the best way to win in the marketplace."
Beverage stock analyst Mark Swartzberg of Stifel Nicholaus, New York, wrote in an industry note yesterday that the proposed deal is an indication of the direction the beverage industry is headed.
"We take the evident likelihood of a deal as an endorsement of PepsiCo's nearly completed purchase of its largest U.S. bottlers," Swartzberg wrote. "We also view it as an indication that North America's growth and mix challenges are deeper than previously advertised and/or believed in the minds of Coke leadership. As such, we believe any transaction would be motivated by the same objectives of PepsiCo's deals, including increased distribution flexibility and cost savings."
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