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Is Coca-Cola Amatil Ltd (ASX:CCL) about to make a big acquisition?

The share price of Coca-Cola Amatil Ltd (ASX: CCL) is jumping higher this morning as Morgan Stanley talked up the potential for the beverage company to buy Kirin’s Lion Dairy & Drinks business that generates $2 billion in annual revenue.

The stock lifted 1.4% to $9.45 at the time of writing when the sector has dropped into the red with Woolworths Group Ltd (ASX: WOW), Treasury Wine Estates Ltd (ASX: TWE) and Costa Group Holdings Ltd (ASX: CGC) falling 0.5% to 1.5%.

Such an acquisition could provide Coca-Cola Amatil some much needed growth options given its problems in its Indonesian operations and the growing consumer distaste for sweet carbonated drinks.

Morgan Stanley highlighted four other reasons why the takeover of Lion Dairy & Drinks makes sense for Coca-Cola Amatil, reported the Australian Financial Review.

The first, which I found most interesting, is that Coca-Cola Amatil’s Australia beverages head, Peter West, was the ex-managing director of Lion Dairy & Drinks until January this year. If anyone knows where the real synergies are for the merger, it would be him.

Another reason is that the acquisition would fit nicely into the new direction that the mothership, US-listed The Coca-Cola Co, is taking under a new chief executive officer, James Quincy. He wants to shift to shift away from sparkling drinks and the acquisition of Costa Coffee in the US underscores this point.

Lion Dairy & Drinks, which is the second largest milk processor after Murry Goulburn, owns the Big M and Dare milk flavoured brands, Dairy Farmers, Yoplait and Farmers Union, among other brands.

Coca-Cola Amatil owns Barista Bros and the acquisition could allow it to improve its cold-chain distribution capabilities and cross sell more products through its large distribution network.

The final reason supporting the takeover is Coca-Cola Amatil’s weak position in the milk flavoured drinks category as it only has the Barista Bros brand, which holds no more than 7% of the market. The acquisition would add significantly more market share to Coca-Cola Amatil’s stable very quickly.

What this also means is that Coca-Cola Amatil may be better able to pass on rising costs to Woolies and to the Wesfarmers Ltd (ASX: WES) owned Coles supermarket chain.

Assuming a multiple of around five times earnings (as many such transactions are typically priced), Coca-Cola Amatil may need to cough up around $400 million to consummate the deal.

The ASX-listed company reported having $851.6 million in cash on its balance sheet as of June 29, 2018, but has debt of around $2.4 billion. One shouldn’t rule out a cap raise if Coca-Cola Amatil and Kirin reach an agreement.

Japanese beverage giant Kirin had announced a strategic review of its dairy business this week and it’s expected that a decision will be made within four weeks.

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Motley Fool contributor Brendon Lau has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended COSTA GRP FPO and Wesfarmers Limited. The Motley Fool Australia has recommended Coca-Cola Amatil Limited and Treasury Wine Estates Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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