Coca-Cola Co plans to buy the North American operations of its largest bottler, Coca-Cola Enterprises Inc, in a strategic reversal that would close a competitive gap after PepsiCo reached a similar deal.
In return for the taking control of the North American business, Coke will relinquish its 34 percent stake in Coke Enterprises, worth $3.21 billion at Wednesday's close. It will also assume $8.88 billion in CCE debt.
Coke Enterprises will remain a publicly traded company focused on Europe, with assets in countries including France and Belgium. As part of the deal, it will buy Coke's bottling operations in Norway and Sweden, and have the right to buy the controlling interest in Coke's German bottling business.
CCE will make a one-time payment of $10 a share to its stockholders, who will also receive shares of the new Coke Enterprises.
The transaction will help Coke cut costs and increase flexibility in its distribution. Coke's announcement on Thursday comes just as PepsiCo is due to close the $7.8 billion purchase of its largest bottlers, Pepsi Bottling Group Inc and PepsiAmericas Inc .
"Coke couldn't sit back while Pepsi delivered $600 million (or more) in synergies for reinvestment and then transformed its U.S. business model," said ConsumerEdge Research analyst Bill Pecoriello.
Pecoriello said the main question was whether Coke should keep the North American bottling operations for the long term, or eventually sell it to Coca-Cola Femsa , a venture with Mexico's FEMSA .
FEMSA has said recently that it was looking for acquisition opportunities in the soft-drink bottling industry after selling its beer unit to Heineken.
CCE shares rose 33 percent, or $6.41, to $25.59, while Coke's shares fell 3.7 percent to $53.08, both on the New York Stock Exchange.
Strategy shift
Coke Chief Executive Officer Muhtar Kent told CNBC television the two companies had held talks for more than a year about how to strategically transform the North American soft-drink business.
"Our North American business structure has remained essentially the same since CCE was founded in 1986, while the market and industry have changed dramatically," Kent said in a statement.
Until now, Kent had repeatedly expressed his commitment to the current franchise model where Coke sells beverage concentrate and CCE bottles and distributes the drinks.
CCE's North American business comprises about 75 percent of Coke's U.S. bottler-delivered sales volume and almost all of its Canadian bottler-delivered volume.
In addition, the companies agreed in principle that CCE would pay $822 million for Coke's bottling operations in Norway and Sweden and have the right to acquire the soft-drink maker's 83 percent equity stake in its German bottling operations 18 months to 36 months after closing.
Coke expects cost savings of $350 million over four years and the transactions should add to earnings by 2012.
CCE will keep its name and U.S. stock listing. It is expected to announce a $1 billion share buyback shortly after the deal closes, expected in the fourth quarter of 2010, and plans an initial annual dividend of 50 cents per share.
