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Is Coca-Cola Amatil Limited a takeover target?

Soft drink bottler Coca-Cola Amatil Limited (ASX: CCL) has run into a wall of issues in recent times, and it can add two more issues to its current list.

Tropical cyclone Ita has wiped out an estimated 90% of the sugar cane crop in far North Queensland. The damage bill is estimated in the tens of millions of dollars, but could force sugar prices higher. As you can probably guess, sugar is a major ingredient in many of Coca-Cola Amatil’s (CCA) products.

The second issue is that thanks to the company’s shares falling in value, CCA could become a takeover target. In 2008, brewer Lion made a $7.3 billion bid for Coca-Cola Amatil, but withdrew from talks, after The Coca-Cola Company refused to sell its 30% share in CCA. Lion offered $10.80 per CCA share, which is higher than today’s price of $9.38.

At the time, Lion estimated the combined company would deliver between $100 and $130 million in synergies per year. CCA said that Kirin was a major competitor in the juice and flavoured milk market in Australia, and a number of conditions would have to be met around those, before Coke would consider the deal.

Coca-Cola Amatil is facing massive aggressive discounting from competitors as well as pricing pressures from supermarket players Woolworths Limited (ASX: WOW) and Coles – owned by Wesfarmers Limited (ASX: WES). When CCA is selling cans of Coke for around 50 cents (in cartons, which are almost always on sale) try and imagine how much it costs CCA to produce that can. CCA could also be facing increased competition from a new player on the block in Bionade, as I mentioned in this article.

CCA’s fruit and vegetable processing subsidiary SPC Ardmona is similarly struggling with overseas competition and high local labour costs. And Coca-Cola Amatil’s Indonesian operations are struggling, thanks to a 20% depreciation of the Indonesian Rupiah.

Foolish takeaway

You’d have to think that Lion may well be reconsidering a bid for Coca-Cola Amatil, given the 35% fall in CCA’s share price over the past year. CCA would be a good fit for Lion, although some segments – like juice and flavoured milk – may raise ACCC concerns. Watch this space.

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Motley Fool writer/analyst Mike King owns shares in Coca-Cola Amatil and Woolworths. You can follow Mike on Twitter @TMFKinga

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