Coca Cola fights Pepsi

February 26, 2010

, WASHINGTON, Feb 26 – Coca-Cola unveiled plans Thursday to take over the North American operations of its largest bottler, gaining control of production and distribution in a market shifting away from carbonated drinks.

The soft drink giant said it would acquire the North American operations of its largest bottler, Coca-Cola Enterprises (CCE).

The largely cashless deal also called for Coca-Cola to sell its bottling operations in Norway and Sweden to CCE. At the close of the agreement, Coca-Cola Co. would have direct control over approximately 90 percent of total North American volume.

A company spokesman said the total value of the transaction was between 12.5 and 13.0 billion dollars, depending on various factors.

The acquisition uses Coca-Cola shares and its current 34 percent stake in CCE, in a swap of assets. The soft drink group also agreed to assume 8.88 billion of CCE debt.

Concurrently, the deal would see CCE buy Coca-Cola\’s bottling operations in Sweden and Norway for 822 million dollars, subject to the signing of definitive agreements.

The bottler would have the right to acquire Coca-Cola\’s 83 percent stake in its German bottling operations at a later date.

"This is a truly historic day for the Coca-Cola system," Coca-Cola chairman and chief executive Muhtar Kent said in a statement.

"Importantly, the creation of a unified operating system will strategically position us to better market and distribute North America\’s most preferred nonalcoholic beverage brands."

The move followed rival PepsiCo\’s announcement last year to acquire two of its key bottlers for a more fully integrated distribution system.

PepsiCo chief executive Indra Nooyi said at the time that "the fully integrated beverage business will enable us to bring innovative products and packages to market faster, streamline our manufacturing and distribution systems and react more quickly to changes in the marketplace."

Tom Taulli, an independent analyst and financial adviser, said both Coke and Pepsi are moving away from the strategy of using independent franchised bottlers in order to have more control in a changing market.

The franchise strategy "now looks outmoded, especially in mature markets like the US," Taulli said.

"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."

Analyst Mark Greenberg at Deutsche Bank said the move by Coke is "validating Pepsi\’s view that a franchise system was unworkable domestically."

The move comes amid dramatic changes in the soft-drink business, with US consumers shifting away from carbonated beverages to bottled water, juices, sports drinks and energy drinks.

Coke reported that in 2009 total beverage case volumes rose 3.0 percent, but most of that was in the non-carbonated segment, such as its Dasani water and Fruitopia and Minute Maid juices.

CEO Kent, speaking to CNBC television, said that "consumers are changing rapidly everywhere around the world, not just here in the United States. Consumers are changing in China. Consumers are changing in Russia. Consumers are changing in Western Europe and Latin America.

With the acquisition, he said, "we will have sufficient amounts of synergies and I call it fuel for our brands that will ensure we keep winning in the marketplace."

Standard & Poor\’s reaffirmed its credit rating on Coca-Cola and said the firm "could benefit from manufacturing and distribution efficiencies primarily in the US which has experienced changes in consumer tastes to noncarbonated beverages, as well as an evolving retail environment."


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