In the Spotlight - Coca-Cola Co and Coca-Cola Enterprises deal closes

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The world's largest soft drinks maker, The Coca-Cola Co, has closed its purchase of Coca-Cola Enterprises (CCE) in North America in a deal that will help change the soft drinks sector. just-drinks looks at fresh market reaction in a special edition of In the Spotlight.

Completion of the deal, announced by Coca-Cola yesterday (3 October), came two days after shareholders in Coca-Cola Enterprises endorsed the move, and will give Coca-Cola direct control over most of its North American bottling business.

Coca-Cola said that the move will help it "to more profitably deliver the world's greatest brands and drive long-term value for all shareholders," adding that it expected the takeover to generate "at least" US$350m in annual synergies within four years.

The deal will give Coca-Cola direct control over around 90% of its North American sales volume, which, in turn, the firm expects will result in lower costs, more flexibility and faster innovation.

To date, the company has already named Steve Cahillane, now president of the North American business segment of Coca-Cola Enterprises, to head the bottler business under Coca-Cola after the acquisition.

However, now comes the hard part; the chance to put all those plans for smooth integration into practice.

HSBC analyst Lauren Torres told NASDAQ that further changes in personnel and operations will be gradual. "In light of the softer market environment, [beverage] companies are looking for cost savings benefits and being more efficient with the retailer. Directionally it's the right move [but] it's delivered stage by stage."

Coca-Cola will, among other things, need to liaise with independent bottlers.

Even though Coca-Cola and PepsiCo have direct control over the lion's share of their drinks sold in North America, they need the agreement by the smaller, independent bottlers if they want to make sweeping changes for national accounts.

"Going forward we'll certainly be engaged in more discussions with our bottlers," chairman and CEO Muhtar Kent said in an interview yesterday. He added: "This is not a victory lap. We're far away from any victory lap."

He declined to say if Coca-Cola would seek to acquire more small bottlers, or to discuss what particular changes might be made in the company's distribution network.

"This is not about one move or two moves," he said, according to Money Control, but acknowledged that changes in existing distribution networks was one tactic Coke planned to use to boost performance in North America, where sales have slowed as consumers cut back on bottled beverages due to a weak economy and changing tastes.

"Coke is about to assume the heavy lifting," Tom Pirko, president of California consulting firm Bevmark told The Atlanta Journal-Constitution (AJC). "The consumer has forced and compelled Coke to move away from the model that has guided it for decades."

Pirko said that Coca-Cola has to become a "new kind of company" in order to reshape its bottling operations while handling both niche beverages and billion-dollar brands.

Michael Bellas, CEO of New York-based Beverage Marketing Corp, told AJC one of the first things to change will be the company's supply chain. "Coca-Cola will close redundant plants and combine some plants making soft drinks and juice," he predicted. 

There are signs that some analysts have reserved judgement on the Coca-Cola, CCE combination. JP Morgan analysts were quoted on The Street last month that Coca-Cola had "lost its premium" to its peer group this year due to its surprise announcement to purchase CCE, "challenges in developed markets and increased risk from foreign exchange".

"Coca Cola has been the worst performing name in our US beverage universe, and the stock is no longer priced for near-perfection, as it was in January," JP Morgan said.

As for the new-look CCE in Europe, analyst group Stifel Nicolaus has reduced its target price for CCE from $34 per share to $24 following the acquisition clearance from CCE shareholders.

It reiterated its 'Buy' recommendation on the stock. But, it said that a deteriorated performance in the UK, approximately 35% of 'New CCE' sales, and the weakening of key European currencies versus the dollar provided "notable risks".

Nonetheless, CCE shares increased $0.80 to reach $31.80 this morning (4 October), a rise of 2.58%. Shares in Coca-Cola rose $0.60 or 1.03% to reach $59.12 at 7.57am in New York.

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