Coca-Cola Enterprises has been focusing its efforts on boosting low- and no-calorie options

Coca-Cola Enterprises has been focusing its efforts on boosting low- and no-calorie options

Coca-Cola Enterprises' (CCE) European merger will leave the unit less exposed to the potential introduction of sugar taxes and should improve sales prospects, analysts have said.

In the client notes that followed the company's full-year results last week, analysts hailed CCE's pending merger with the German unit of the Coca-Cola Co and Coca-Cola Iberian Partners, to form Coca-Cola European Parners (CCEP). As well as cost-savings related to synergies across the companies, they believe the merger could also shield CCE from the effects of sugar taxes in markets like the UK.

"We believe a potential tax (in the UK) is less of a risk for CCE (compared to competitors Britvic and AG Barr)," said analysts at Nomura. "Following the proposed CCEP merger, the UK will account for only circa 20% of total volumes."

Nomura estimates that around half of the company's UK portfolio is in low- or no-sugar, meaning a tax is likely to "affect CCEP volumes by under 0.5%".

The UK is not the only concern when it comes to taxes, but CCE has plenty of ammunition, according to CLSA analyst Caroline Levy. "Sugar is increasingly under scrutiny in Europe," she writes. "Belgium implemented a US$0.03/litre tax on sugary drinks in 2016 and UK regulators are considering a 10% to 20% tax." But, Levy notes, the Coca-Cola system is progressively highlighting low- and no-calorie options.

Coke Zero was a stand-out performer for the company in 2015, with volumes rising by 5% in the year. Then, there's the reformulation of Coke Life in the UK, where the amount of sugar in the brand extension is set to be reduced.

Over-arching all of this is Coca-Cola's new one-brand strategy, which brings all four brand Coca-Cola varieties together under one global marketing campaign. 

While CCE flagged a "softer-than-expected consumer sector" in its latest set of results, this didn't come as a surprise to the market. In December, the company warned investors to expect full-year numbers that reflected a "difficult operating environment". CCE even said at the time that the headwinds would continue into 2016.

And yet, despite macro headwinds and regulatory concerns, CLSA's Levy remains upbeat on what the future holds for CCE. "We like CCE for the potential synergies and improved sales prospects from its proposed merger," she says.

SIG analyst Pablo Zuanic, however, is a little more subdued: "The combination of the ten CCE countries with Spain, Portugal, and Germany will certainly yield efficiencies," he says, "but we are doubtful if it will do much to improve lacklustre top-line trends,"

Is Zuanic right? The merger is expected to close in the second quarter of 2016, so it looks like we won't have to wait too long to find out.