Coke Strikes a $12 Billion Deal to Re-Acquire Bottling Business


As Pepsi (PEP) nears the closing date on its $7.8 billion deal to acquire Pepsi Bottling Group (PBG) and PepsiAmericas (PAS), Coke (KO) has announced it plans to follow suit: It will acquire its largest bottler, Coca Cola Enterprises (CCE), in a transaction worth roughly $12.17 billion, which includes the assumption of $9.5 billion in debt. The deal is expected to close in the fourth quarter.

The structure of the deal is somewhat convoluted, involving acquisitions of bottlers in Norway and Sweden. There is even an option to purchase the German bottling operations.

Funny thing: Coke CEO Muhtar Kent has said on various occasions that he was a big supporter of the franchise model. Maybe this was a clever way to ultimately keep the valuation on Coca Cola Enterprises down as speculation started to bubble up.

Whatever the reason, Coke is making a good strategic move, which is likely to help cut costs and improve growth.

The End of an Era

Back in the 1980s, Coke saw a big opportunity for growth, but needed capital to make it happen. So the company developed an innovative strategy: the franchise model. Coke would focus on marketing efforts and produce the syrup concentrates. Then, independent bottlers with exclusive arrangements for certain geographic areas would distribute the drinks across the globe.

All in all, things worked out quite well and Coke became a serious growth story. In fact, by the late 1980s, Warren Buffett took a major stake in the company.

However, this strategy now looks outmoded, especially in mature markets like the U.S. The main reason is the continued sluggishness in carbonated beverage sales. Consumers are moving towards alternatives such as juice drinks, vitamin waters, teas and other niche offerings. By controlling Coca Cola Enterprises, Coke will now have the ability to quickly add new product offerings.

This deal does not mean Coke is poised for a growth spurt in the U.S. However, it is expected to result in cost savings of $350 million over the next four years and be accretive to earnings in 2012. And by allowing improved product mixes, it could lead to a modest boost in revenues. Last year, Coca Cola Enterprises sold 41 billion bottles and cans and generated $731 million in profits.

The big growth story is in emerging markets. In Coke's latest quarterly report, unit case volume increased 8% in Brazil, 20% in India, and a stunning 29% in China.

Coke and Pepsi Deals Have Surprising Winner: Dr. Pepper

When major players like Coke and Pepsi strike deals, there are usually winners and losers. And one of the winners in the Coke deal may actually be Dr. Pepper Snapple Group (DPS), which uses Coca Cola Enterprises as a distributor for its Snapple drinks.

Because of the change-in-control of Coca Cola Enterprises, Dr. Pepper may be receiving a hefty payout. When Pepsi made its deal to reacquire its bottlers, which also distribute Dr. Pepper drinks, it negotiated for the right to keep selling them. In the end, Pepsi agreed to pay Dr. Pepper a cool $900 million for those rights.

In today's trading, Dr. Pepper's shares are up 10% to $31.41. The company also reported its quarterly results, with earnings of $114 million, or $0.44 per share.