Secret formula

Coca-Cola bottling deal targets irksome tax hiccup

What could be more American than Coca-Cola? A 35 per cent corporation tax rate, for starters. That might no longer be a problem for one of the US drinks giant's biggest bottling groups, if a planned three-way merger, which mixes cost savings with tax-efficient goodness, comes to pass.

Coca-Cola Enterprises, which pours, packs and sells the fizzy drink across many European countries, is listed in New York, but its business is all too European. Sales for the continent have been sliding, and reporting euro sales in US dollars adds to the misery. Revenue slid 17.5 per cent in the second quarter of 2015, though only two per cent after currency wrinkles are ironed out.

Merging with two unlisted German and Spanish Coke bottlers is a kind of solution. First, it should create pretty sizable savings, in the region of $375 million of pre-tax synergies a year. Assuming those recur but don't grow, they would have a present value of around $2.8 billion after being taxed and capitalized. The listed-company shareholders get 48 per cent of those in line with their ownership in the new group, and a cash payout of $3.3 billion.

There is other mixology at work. The new entity will be domiciled in the United Kingdom, albeit with listings in Amsterdam, Madrid and New York. That will reduce the need to pay US tax on its foreign earnings. The hit isn't huge - Coca-Cola Enterprises paid $75 million to the US authorities in 2014. But apply to that Coca-Cola Enterprises' forward-year price to earnings multiple of 19, and it's equivalent to $1.4 billion to the group's shareholders, compared to an undisturbed market capitalisation of $10.4 billion.

Deals motivated by a desire to cut tax have set teeth on edge in the United States before. Think of the aborted takeover of UK pharmaceuticals group Shire by US rival AbbVie. In this case, there's less of an objection, since Coca-Cola Enterprises doesn't actually do anything outside of Europe, and since the US entity will still technically exist, it's not a clean break. But it undeniably makes an appealing deal a little bit sweeter.