The price of Coke: why Australian investors got a great deal

Investors that have branded the $9.3 billion bid for Coca-Cola Amatil by its European coke bottling cousin as just COVID-driven opportunism are missing the point. The Coca-Cola mothership in Atlanta is the puppeteer who decides the fate of the coke bottlers within its global empire. Atlanta also gets to choose the price parameters.

Atlanta holds the controlling stake in its European bottler Coca-Cola European Partners (CCEP) and CCA. For decades it’s been Atlanta that decides who owns what in its global empire – and the coke ‘territories’ get moved around like pieces on a chessboard.

Eighteen months ago it decided it wanted to consolidate its Australasian assets with those in Europe – the only surprising aspect to this deal is that it’s taken so long to agree on a price.

Coca-Cola Amatil managing director Alison Watkins is a small piece in the global franchise chess game.
Coca-Cola Amatil managing director Alison Watkins is a small piece in the global franchise chess game.Credit:Louie Douvis

In March last year CCEP made its first offer – a lowball $10 a share. After months of negotiations, the deal was abandoned in September last year only to be resurrected about six weeks ago.


Against this backdrop, the $12.75 per share offer price that won the support of independent directors this week doesn’t look half bad.

It’s not just Atlanta’s pivotal stakes in its array of international coke bottlers that allow it to control the world map (it has about 30 per cent of CCA and about 20 per cent of CCEP), it’s the fact that it’s their dominant raw material supplier.

(If the deal is consummated, Atlanta (called the Coca-Cola Company) will be part-paid with shares in CCEP so its stake in the European bottler will increase.)

The deal contains a decent smattering of window dressing. In the first instance CCEP’s offer is non-binding and conditional on due diligence. The reality is Atlanta (and CCEP) would have a fairly intimate understanding of CCA’s inner workings.

There is also a limit to how CC Amatil’s independent directors can be considered independent. The company has a self-confessed very close working relationship with its Atlanta parent.

Investors need to accept that coke bottlers such as Amatil have some room to play with strategy at the local level but the various bottlers’ management and boards are largely running a listed franchise.

It is a company in which investors should not have expected a decent sized premium for control.

The reality is that CCA (but for a few bright spots) has been a chronic disappointer for years despite valiant attempts by its current management to reduce its cost base.

Those analysts who on Monday took issue with what they considered a skinny offer price appeared to approach the valuation of Amatil as if it were a normal company – one that has seen its earnings and share price hit hard by COVID.

Sure Coke sales and volumes have been under pressure this year as large parts of the country have been staying home and on-premises venue sales have been hugely affected by lockdowns. It is also true that in the current quarter there are clear signs that sales are improving.

But the reality is that CCA (but for a few bright spots) has been a chronic disappointer for years despite valiant attempts by its current management to reduce its cost base.

This brings us to the other reason the offer from CCEP should not be viewed as underwhelming.

Despite having diversified into various product categories such as water, coffee, alcohol and juices under the previous chief executive Terry Davis and current boss Alison Watkins, the company is still primarily a seller of carbonated soft drinks.

And in the western world this is a product that has been disrupted by a growing focus on health (in recognition of the dangers of excess sugar consumption) and on the environment (ie packaging).

And this disruption is only going to continue.

It is recognition of this trend that has accelerated CCA’s move into non-fizzy soft drink products. In recent months it has been in negotiations to buy beer brands Stella Artois and Beck’s from Japanese drinks group Asahi. It is expected that regardless of the takeover from CCEP, CCA will stay in the running to acquire these boutique beer brands. Its offer is said to be about $300 million and is the subject of a carve-out in the CCEP offer proposal that will allow it to go ahead.

This suggests that Coke’s head office in Atlanta may have some sympathy or even some appreciation of the merits of product diversification.

But investors who are disappointed by CCEP’s offer price will understandably point to the fact that CCA was trading a touch above $12.75 in February before COVID hit and over time it may have returned to that point in the absence of a bid.

As such they are applying a short to medium-term lens to the company. Until Monday the average analyst target price for CCA was $10.04 and the offer represents a 27 per cent premium to that target.

Shareholders that buy into any company within the worldwide Coke franchise need to understand the risks and the rules.

While Atlanta won’t get to vote its 30 per cent stake at the shareholder scheme approval process, the remainder of the share register is pretty heavily stacked with large offshore index funds that have a tendency to approve deals rather than go into battle.

This takeover looks like a pretty safe bet.

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