Coke to buy CCE’s N. American operations

The Coca-Cola Co., Inc. announced Thursday its intent to acquire Coca-Cola Enterprises’ North American bottling operations. The move parallels a decision by archrival PepsiCo to absorb its own chief North American bottlers, and comes after repeated denials that Coke was exploring the strategy.

Coca-Cola CEO Muhtar Kent said his company was committed to its bottler franchise model as recently as a November investors’ conference. That stance evaporated Thursday, as Kent and John Brock, chairman and CEO of Coca-Cola Enterprises, said they had discussed a North American merger for over a year.

“The franchise structure needs to always evolve, as consumers evolve, customers evolve,” Kent said on CNBC. “Our structure has not changed since 1986.”

He downplayed the move as seeking nimbler distribution for non-core, niche beverages. He and Brock said they believe Coke’s core CSD’s can grow in the U.S. despite conventional wisdom that consumers are shifting away from sodas.

“We have demonstrated that in developed markets, our sparkling business can grow. That can happen domestically, as well,” Brock said.

Instead, they emphasized operational efficiencies – estimated at $350 million over four years – created by the merger.

“Our business was structured differently in the U.S. anyway,” Kent said, adding that the Coca-Cola Co. already operates a fountain business, filling factories, and a large-scale juice business, all functions that are handled by franchisees overseas.

And CCE will handle more overseas operations if the deal goes through. Coke said in a press release that it agreed to sell European bottling operations to CCE as part of the agreement in a “substantially cashless” transaction.

UBS analyst Kaumil Gajrawala lauded the announcement, saying in a note to investors that “We believe a fully integrated supply chain in [North America] is the right strategic move for the Red system (we view the PEP/PBG/PAS deal positively as well).”

He also noted that Dr Pepper Snapple Group, which acquired a string of its bottlers ahead of its 2008 spinoff from Cadbury, could be a surprise winner in the deal. A Coke/CCE merger will likely trigger a provision giving DPSG the opportunity to bargain with Coke over distribution rights for DPSG brands, Gajrawala said. Similar provisions in DPSG’s contracts with PBG and PepsiAmericas netted the company a $900 million payout. Pepsi’s anchor bottlers Gajrawala noted, distribute 25.6 percent of DPSG’s volume while CCE distributes 27 percent of Dr Pepper.