Coca-Cola to buy largest bottler’s North American operations; deal mirrors moves by Pepsi

Coke to acquire bottler’s North American business

NEW YORK — Coca-Cola plans to buy the North American operations of its largest bottler in an effort to put more new drinks on shelves more quickly to keep up with changing tastes.

The move comes just days before main rival PepsiCo is expected to complete a similar deal.

The Coca-Cola deal marks a change in strategy — at least publicly — for Coca-Cola Co., which has defended its arrangement of being separate from its bottlers ever since PepsiCo announced its $7.8 billion deal to buy its two biggest North American bottlers in August.

Both companies want to control distribution in their domestic market, where soft drink sales are slumping as people switch to juices and teas or skip purchases to save money.

The shift means shoppers will see more new drinks — like coconut water, exotic teas and sports beverages — on store shelves. Products that don’t sell will disappear more quickly. And shoppers may not find the same choices in the same places because Coca-Cola will have more control over where products appear, right down to the shelf, and how much they cost.

Coca-Cola’s deal calls for the maker of Sprite, Coke and other beverages to give up its 34 percent stake in bottler Coca-Cola Enterprises Inc., worth $3.4 billion, and assume $8.88 billion in debt.

In a separate deal, Coca-Cola will sell its own Norwegian and Swedish bottling operations to Coca-Cola Enterprises for $822 million. Coca-Cola Enterprises also gets an option to buy Coca-Cola’s 83 percent stake in its German bottling operations.

Coca-Cola Enterprises shareholders will get one share of a new Coca-Cola Enterprises company focused only on European bottling and a one-time $10-per-share payment. The company plans to issue debt to finance this payment and the European acquisition. It had 490 million shares outstanding at the end of fiscal 2009, so taking out Coca-Cola’s stake, cash payouts should be about $3.2 billion to shareholders.

Following the deal, Coca-Cola will control about 90 percent of the bottling of its products in North America, while PepsiCo’s pending deal will give the company control of 80 percent. That deal is expected to close by the end of the month.

The Coca-Cola move surprised investors because CEO Muhtar Kent had denied interest in such a move since PepsiCo’s deal was announced. On Thursday, he insisted the deal wasn’t a reversal of strategy.

“It is an evolution. We have been doing lots of things in the marketplace, but this is in no way an about face,” he said on a conference call, adding the moves had been planned for months.

Shares of Coca-Cola Enterprises set new 52-week highs on the news, rocketing $6.32, or 33 percent, to $25.50 in afternoon trading Thursday. Coca-Cola shares fell $2.36, or 4.3 percent, to $52.80. Shares for both companies, which are based in Atlanta, traded on extremely heavy volume.

The move is not good for Coca-Cola shareholders because it essentially makes half of Coca-Cola’s revenue depend on the slow-growing U.S. market, up from 25 percent, said Caroline Levy, a U.S. equity research analyst with CLSA Asia-Pacific Markets.

Some speculated that Coca-Cola pursued the deal so it can turn around in a few years and sell its entire North American operations to another bottler, such as Mexican brewer and beverage maker Femsa SAB.

“The hope is for Coca-Cola shareholders that this is a turnaround, where they can drive up margins quickly and then sell off restructured assets into other bottlers,” she said. “That’s their best hope.”

The deals are expected to close in the fourth quarter. Coca-Cola said it has halted share buybacks so far this fiscal year as a result of the deal and doesn’t plan to buy back any more shares until the deal closes.

Controlling distribution also means savings for soft drink makers. Coca-Cola expects cost savings of $350 million over four years. It said the acquisition will add to earnings per share by 2012.

PepsiCo estimates buyout of Pepsi Bottling Group Inc. and PepsiAmericas Inc. will mean $400 million in savings, though analysts predict figures possibly double that.

Coca-Cola and Pepsi in recent decades have mostly focused on marketing their products, leaving distribution to other companies. They create product ideas and sell concentrate to bottlers, who then make and distribute drinks to stores, controlling much of the fate of new drinks.

Coca-Cola “couldn’t sit back” while PepsiCo remade its business, said Bill Pecoriello, an analyst who heads ConsumerEdge Research LLC.

But PepsiCo loses some of its advantage now, because it won’t be the only company doing this. Still the company will get extra benefit from its deal because it will be marketing its Frito-Lay snacks more closely with its drinks in stores.

Coca-Cola chose the unusual structure for its deal because it’s a way to avoid paying corporate taxes, said Robert Willens, president of tax advisory firm Robert Willens LLC. But shareholders of Coca-Cola Enterprises will most likely pay taxes on their gains after their $10 payment and the value of the new stock.