Comment - Coca-Cola Enterprises Bides Its Time Over Germany Buy

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Coca-Cola Enterprises' (CCE) anticipated purchase of The Coca-Cola Co's German operations has become the subject of much speculation amongst industry observers about both the opportunities from and the sticking points behind a potential deal.


When Coca-Cola acquired CCE's North American operations in February last year, CCE subsequently gained the option to acquire Coca-Cola's 83% stake in its German bottling unit. The Coca-Cola bottler's time window for acquiring the German operations only opened in August this year, but nonetheless, the company is yet to give an indication when a deal might take place.

Earlier this week, the bottler's CEO, John Brock, suggested to analysts that a deal is likely at some point, but he was careful to add that nobody should contemplate the announcement of the transaction this year and that CCE's current focus is on returning cash to shareholders.

Germany contributes about 15% of Coca-Cola's volume in Western Europe. It is also the largest population centre in Europe and remains a growing market with the potential to boost CCE's annual volumes by 50%.

Given that CCE has the cash and Germany is a more than appealing market, why has it not snapped up the division yet? Earlier this year, analyst group Sanford Bernstein cited Germany's "difficult consumer, retailer, and economic environments" as potential risks to a purchase.

The analysts noted that Germany is a "famously difficult consumer market", with private label holding 37% of the total soft drink market in volume terms, compared to Coca-Cola's 10%. In addition, the country's retail infrastructure is already heavily consolidated, with discounters and hypermarkets making up a large portion of the retail landscape.

Datamonitor consumer packaged goods analyst Michael Hughes, echoed this sentiment. "As well as the high costs associated with the purchase," he told just-drinks, "it needs to be remembered that overall growth rates in the German market are lower than other major markets in Europe such as the UK, Spain and Russia. Furthermore, private label accounts for a considerable proportion of volume of all non-alcoholic beverages sold in Germany, including cola, highlighting the tough conditions that Coca-Cola Enterprises would find if it was to look to make a quick return on investment."

Despite this, the purchase is seen by Hughes as "a logical step", given the country's CSD market is the second biggest in Europe, generating sales of US$10.43bn in 2010.

There is no doubt that Coca-Cola has seen its market share eroded in Germany over the last few years, primarily due to strong competition from discount retailers. However, the country is starting to look like a turnaround story for the soft drinks firm.

In April, Coca-Cola recorded a 1% rise in first-quarter volume sales in Europe, driven by 4% volume growth in Germany. Coca-Cola is confident it is winning again in all channels in the country.

But, it has become evident that Brock will not buy off Coca-Cola on a whim. Last year, the CEO pointed out that a German transaction would only be done at the "right price" and if it "creates value".

A spokesperson for CCE told just drinks that the company is yet to make an announcement due to it being "early in the process".

"When we entered into the transaction [with The Coca-Cola Co], we had a period of 18 to 39 months to complete a purchase. That period has just begun so we're in the middle of doing due diligence and continuing the process and working with Coca-Cola," the spokesperson said.

"The only thing that Jon [Brock] has said on the deal is that it wouldn't be before the end of 2011," he added. "The window just opened for us to begin the conversation so no news is no news."

While Coca-Cola might be happy to offload its German bottling unit, Brock may now be weighing up the risks involved in such a challenging market with its strategic importance to CCE.

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