Coca-Cola to buy North American bottler for $12.3 BN

Coca-Cola Co, the world’s biggest soda maker, agreed to buy the North American operations of bottler Coca-Cola Enterprises Inc in a deal valued at $12.3 billion, more than six months after PepsiCo Inc moved to bring its bottlers in-house to cut costs.

The bottler’s investors will get $10 and one share in a new bottling company for each share they hold, Atlanta-based Coca- Cola said in a statement. Coca-Cola will also assume $8.88 billion of the bottler’s debt.

Coca-Cola Enterprises agreed to buy Coca-Cola’s bottling operations in Norway and Sweden and will have the right to buy Coca-Cola’s stake in its German bottling operations. Coca-Cola said the takeover may result in savings and additional revenue opportunities of $350 million over four years. As soft-drink volume sales in the US market have declined since 2005, Coca-Cola Chief Executive Officer Muhtar Kent has introduced new packaging and pricing in North America to draw customers in addition to cutting supply-chain costs.

“Ownership and scale together is a powerful combination,” Sarah Henry, an analyst at MFC Global Investment Management in Berwyn, Pennsylvania, said today by telephone. She helps manage PepsiCo shares and doesn’t manage Coca-Cola or Coca-Cola Enterprises shares. “North America is a mature market that’s been in a state of decline.” MFC manages $287 billion in assets.

Coca-Cola Enterprises, also based in Atlanta, climbed $5.82, or 30 per cent, to $25 at 9:39 am in New York Stock Exchange composite trading. The company had a market value of $9.4 billion as of yesterday’s close. Coca-Cola fell $1.86 to $53.30, while PepsiCo declined 20 cents to $61.88.

Coca-Cola and PepsiCo sell beverage concentrate and syrup to licensed bottlers, which add water and other ingredients, put the mixture in bottles and cans, and sell it. In 1999, PepsiCo followed Coca-Cola’s lead by spinning off its capital-intensive bottling operations to create Pepsi Bottling Group Inc.

Bottling “is not nearly as good as the syrup business, because you are taking on a lot of fixed assets in the process,” Donald Yacktman, founder of Yacktman Asset Management Co, said in a Bloomberg Television interview. “They are taking on a business with lower inherent returns for more control and cost savings.”

Yacktman’s Austin, Texas-based firm manages $3.2 billion in assets, including Coca-Cola and PepsiCo shares.

Coca-Cola currently owns about 34 per cent of Coca-Cola Enterprises, a stake it values at $3.4 billion. The transaction should close in the fourth quarter of 2010, according to the statement. Coca-Cola said the takeover will give it direct control over about 90 percent of North American volume.

PepsiCo, the second-largest soft-drink maker, agreed in August to take control of its two biggest bottlers for about $7.8 billion. Those purchases may allow PepsiCo to garner about $400 million annually from cost savings and improved revenue opportunities, the company said this month. North American volume at Coca-Cola Enterprises declined 5 per cent last year, while net pricing per case increased 6.5 per cent, the company said in a February 10 earnings report.

Allen & Co and Goldman, Sachs & Co advised Coca-Cola. Skadden, Arps, Slate, Meagher & Flom LLP provided its legal counsel and Cleary Gottlieb Steen & Hamilton LLP and Wilson Sonsini Goodrich & Rosati were antitrust advisers.