CCE shares shot up after the deal became public

CCE shares shot up after the deal became public

Coca-Cola Co's $12bn deal to acquire the North American operations of Coca-Cola Enterprises has dominated business news headlines in the last 24 hours. Here, just-drinks digests the market reaction.

Shares in Coca-Cola Enterprises (CCE) rocketed by around a third following the announcement of the deal yesterday (25 February). CCE Shareholders in the bottler are set to reap a collective $4bn from the deal.

Shares in The Coca-Cola Co, meanwhile, fell from around the $56 mark to day low of sub-$53 and have stayed there into today.

Dr Pepper Snapple Group, which reported solid progress in its full-year earnings yesterday, also saw its share price rise by 7% following news that it stands to receive a windfall from the CCE deal due to current distribution agreements.

Immediate thoughts on the tie-up were, quite naturally, that Coca-Cola has decided to mimick the PepsiCo business model. PepsiCo is further down the track, having today announced the completion of a deal to take full control of its own major bottlers, Pepsi Bottling Group and PepsiAmericas.

Suggestions of copycat planning were, however, denied by Coca-Cola's CEO, Muhtar Kent, yesterday. He told analysts that CCE and Coca-Cola were in talks even before PepsiCo went public with its plan.

We will never know the ins and outs of it, but what it does show is that both companies believe that their North American business model requires seismic change.

While Wall Street once welcomed soft drinks firms' separation from their bottlers, "consumer behaviour has changed", argued Rob Cox and Wei Gu on Reuters BreakingViews.

Both Coca-Cola, and PepsiCo before it, have pointed out that a combined unit offers more flexibility to meet the diverse demand in today's soft drinks market in North America. Staple brands like Coke and Pepsi have been joined by a plethora of new categories, such as functional waters, energy drinks and teas.

Some analysts questioned what might come next.

Mark Swartzberg, of Stifel Nicolaus, said that the main indirect winner from the deal is Dr Pepper Snapple (DPS), which "finds itself with potential for another material financial windfall". DPS is already set to receive $900m in licensing fees from the PepsiCo bottlers deal.

CCE North America currently distributes just over a quarter of DPS' carbonated drinks in the region, similar to the amount distributed by Pepsi bottlers, according to Stifel. "We believe contracts for such volume have change of control provisions, as had been customary historically and is the case with bottling handled by Pepsi bottlers."

On Coca-Cola, Swartzberg mused as to the company's endgame. "Coca-Cola's new plan is an intermediate step. Next-step options include Coke FEMSA, Coke's largest bottler in Mexico, in our opinion," he said.

Other observers also brought FEMSA into the acquisition. It is not thought that Coca-Cola would necessarily seek to acquire Coca-Cola FEMSA in Mexico, but could instead sell the CCE business to FEMSA, according to Consumer Edge Research, quoted in the Financial Times newspaper.

If that is the case, Muhtar Kent looks more credible in his claim not to have performed a strategic "about-face" by bringing its bottler in-house. It is worth noting that CCE operations will remain independent in Europe.

More broadly, analyst group Standard & Poor's today shone a more sobering light on both bottler deals. It placed a negative rating on PepsiCo's unsecured debt, putting the firm at A-1 in the short-term.

"The negative rating outlook on PepsiCo continues to reflect our concerns that, following the bottler acquisitions, PepsiCo's consolidated credit measures are likely to remain below our current expectations for the Pepsi system over the near to intermediate term and could be pressured further by expected debt-financed share repurchases," said the firm.

Speculation over the Coca-Cola deal and scrutiny of the implementation of the PepsiCo deal will surely continue over the next few weeks and months. One thing is certain, however, and that is that both deals are set to significantly alter the way the North American soft drinks sector does business over the next couple of years.