coca cola enterprises merger

Consumer M&A doesn’t come much more mega than last week’s €28bn merger of three European Coca-Cola bottling operations.

The unification of Coca-Cola Enterprises with fellow Coke bottlers in Iberia and Germany is the largest European consumer transaction so far this century - only beaten in the all-time list by 1997’s Guinness/Grand Metropolitan merger. With combined sales of $12.6bn the new Coca-Cola European Partners (CCEP) will be anchored in Western Europe and create the world’s largest independent Coke bottler, with 300 million consumers across 13 countries and 50 plants.

Despite its scale (it will instantly become one of the five biggest consumer goods firms in the UK), the deal hasn’t generated the same excitement as other consumer megadeals.

Rather than the deal’s potential, the major talking point so far has been its so-called “tax inversion” format, with the previously US-based Coca-Cola Enterprises (CCE), Spain’s Coca-Cola Iberian Partners (CCIP) and Germany’s Coca-Cola Erfrischungsgetränke (owned by Coca-Cola Company) moving their merged corporate HQ to the UK to benefit from our comparatively low corporation tax rates.

CCE CFO Nik Jhangiani is insists, however, this is “not a tax-driven deal”. Though the UK has a corporate tax rate of 21%, CCEP’s expected effective tax rate of 26%-28% is in-line with CCE’s existing adjusted rate of 26.8%. And the key driver, he says, is potential operational benefits that can be generated from bringing the three bottlers together.

Akeel Sachak, global head of consumer at Rothschild, which advised Coca-Cola Iberian Partners on the deal - and advised on a number of other European soft drinks transactions in recent years - agrees: “The centre of gravity of Coca-Cola’s European bottling business will move to Europe from Atlanta. It is significant that a business that serves European customers and consumers will be owned and managed out of Europe and will sit squarely within the European capital markets, which was not the case for CCE.

“The transaction represents an acknowledgement that operating in Western Europe along national boundaries rather than on a regional basis has impeded development of Coke’s potential in Europe,” he says. “This combination will free up resources to invest more aggressively behind the brands and commercial execution to create a more effective platform for growth.”

Bernstein analysts caution that these synergies remain “somewhat vague”, but notes there is potential to improve operational efficiencies and streamline its networks.

The deal is expected to drive annual pre-tax synergies of approximately $350-$375m. And concerns have been raised that they will potentially include job losses and closures of around 50 bottling plants across CCEP’s 13 territories. But with current leverage of 3.5 times EBITDA expected to reduce to 2.5 times by year-end 2017 due to the cash-generative nature of the savings, the strength of the combined balance sheet is expected to provide extra room for investment in cross-border marketing, greater product development and rolling out innovations across more territories, as well as sharing best practice across territories - a board priority.

Carbonates currently account for 87% of CCE’s volumes, and as one commentator notes, the merger may create more scope to grow non-carbonated brands through new product development, as still drinks remains an area where “growth is really not leveraged yet in Europe”.

coke coca cola production line

More deals to be done?

The relatively low debt/EBITDA level also suggests “there is room for additional M&A post-integration”, according to analysts from HSBC.

When CCE was looking at expanding its European footprint, a number of analysts pointed to Western European countries held by fellow European bottler Coca-Cola Hellenic as potential targets.

Coca-Cola Hellenic owns the Coke bottling licences for Western European countries including Ireland, Italy and Austria as well as its Central and Eastern European heartland, and has been tipped as a possible target. “The obvious scenario is CCH’s European business gets handed to CCE and CCH becomes an Eastern European business,” one source notes. “But I think CCH would fiercely resist this.”

A smoother route to consolidation may be via Carlsberg’s position as the Coca-Cola bottler in Denmark and Finland, licences Carlsberg has “no obvious reason” to hold.

The future board of CCEP did not dismiss expanding its European footprint via acquisition. But n a call with analysts, CCE CEO John Brock cautioned: “We have our work cut out to put the new entity together and make it successful. M&A will have its place again but I don’t think that’s in the near term.”

CCEP’s immediate strategic priorities are more modest, but they could be no less important. A key message CCEP’s new board repeatedly stressed was the new structure would see the sharing of market insight and best practice across the new group - something Coke’s critics have accused it of not achieving previously as each bottling operation operated too autonomously, hampering wider cross-border execution and growth.

One of the key drivers of this merger has been the experience of Coca-Cola Iberian Partners itself, which consolidated eight family owned bottlers in 2013 into a single company, creating “a much more efficient and effective organisation” according to Sachak, who also worked on that 2013 deal.

The importance of the Iberian business, which is more profitable than Germany to the new organisation, was highlighted by HSBC. The broker said: “This is not the first time CEO John Brock helps create a structure where the small fish gets to eat the big fish (recall InBev) and this is essentially how we view the role of the Iberian partner.”

And what of its customers? The deal is only expected to close in the second quarter of 2016 and still requires regulatory approval (though few foresee significant issues on this front).

But even when the new structure is operationally ready to go, on a national level it is unlikely to have a huge impact on existing retailer relationships.

Where the impact will be more keenly felt is by those retailers with operations in multiple countries - like Carrefour with operations in France, Belgium and Spain, or Ahold in Portugal, Sweden, Norway and the Netherlands - which instead of dealing with multiple bottlers must now deal with just one overarching company. “It has been very difficult and complicated for Coke bottlers trying to talk to big customers across Europe,” says Nomura analyst Ian Shackleton. “There could be a number of bottlers in the room and you end up with all sorts of collusion issues.

“So this deal makes it easier. But does it leave Coke bottlers in a stronger bargaining position with those retailers? ‘Not necessarily’ is the answer.”

Culture shift

Brock insists the new structure is mutually beneficial to cross border retailers and Coca-Cola and he “doesn’t see the balance of power shifting significantly” between the two as “so much negotiation remains done on a country level”.

“Our sense is this transaction means we’ll retain the current relationships we have across markets and in some markets will give us abetter relationship with customers like Carrefour,” he says.

At a wider level, the transaction is further evidence of two key themes in the global fmcg sector. First, the deal points to the long-awaited potential for consolidation in which fmcg category leaders might look to create more truly cross-border businesses.

Second, the deal underscores a culture shift within Coca-Cola Company itself where revenues will start to take precedent over volumes, says Carlos Laboy, global beverage & LatAm food analyst at HSBC. After meeting Brock this week, he said: “I was struck with the power of conviction and relief with which he talked about the much-awaited arrival of this new era of value over volume in Atlanta.

“Getting everyone in HQ and across the world of Coke focused on the right model of value over volume changes everything. As Coke bottlers around the world build a longer and a better price package ladder, they can now capture the value of the brand better.”

The merger therefore points to a fundamental growth opportunity for the Coke consumer brand as a whole within Europe and beyond. “This deal puts strong operators with the right business model, with new opportunities in place, at the same time,” he enthuses. “It is not just a merger.”

Which could go to show it’s not necessarily the most glamorous deals that turn out to have the biggest impact.