The rationale behind the Coca-Cola Amatil (ASX:CCL) takeover bid

Coca-Cola Amatil has received a $9.3 billion takeover offer from Coca-Cola European Partners. Here's what you need to know.

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Coca-Cola Amatil Ltd (ASX: CCL) is one of the largest bottlers in the Asia Pacific region. This $9 billion Australian beverage business spans Australia, New Zealand, Fiji, Indonesia and Papua New Guinea, and also belongs to a network of independent companies connected to The Coca-Cola Company (NYSE: KO).

Coca-Cola Amatil operates as an authorised bottler and distributor of the US Coca-Cola Company. As part of its recent investor presentation the Australian arm released unaudited third quarter results, with group revenue and volume down 4.2% and 5.4% on the prior corresponding period – a result that is relatively unsurprising given the impact of the coronavirus pandemic. What is surprising is that it has also received a $9.3 billion takeover offer from Coca-Cola European Partners (NYSE: CCEP).

The deal has been labelled as opportunistic by Coca-Cola Amatil shareholders, who think the bid offer does not take into account the bottler's third quarter recovery (compared to the first half). Independent shareholders will receive $12.75 per share in cash, less final 2H20 dividends paid, subject to approval from shareholders and regulators.

The Coca Cola Amatil share price jumped more than 16% after the announcement. Let's look at the reasons for the takeover bid and Coca-Cola Amatil's future prospects, assuming the deal is approved.

The refranchising strategy of The Coca-Cola Company

The Coca-Cola Company announced its plan to refranchise bottling operations in 2016 to focus on building brands and developing products.

The Coca-Cola Company holds a nearly 31% stake in Coca-Cola Amatil and a 19% stake in Coca-Cola European Partners. Coca Cola European Partners was formed in 2016 by 3 European companies with a market capitalisation of $17.4 billion. If the takeover proceeds, the Coca-Cola Company will hand over its shares in Coca-Cola Amatil to Coca-Cola European Partners.  

Under the proposed takeover, Coca-Cola Amatil will shed expensive, global bottling operations to become a more nimble, less capital intensive and more profitable beverage business.

Premium brands with higher profit margin

The Coca-Cola Company has been developing a new business model of higher prices, smaller packages and premium brands to deliver modest volume growth but greater profitability. One way this can be achieved is by bringing together 2 Coca-Cola bottlers.

The takeover will provide access to a broader and more balanced geographic footprint for consumer reach, especially the company's non-alcoholic ready to drink (NARTD) products (including Coca-Cola no sugar, energy drinks and juices).

National NARTD volume in Australia grew 1.9% in the first 3 weeks of October compared to the declining sales in alcohol and coffee products, according to the company's recent investor briefing. I think this space is the growth driver for the company, as consumers are becoming more health conscious amid the pandemic.

Foolish takeaway

From a business perspective, I can see the strategic rationale of a takeover to deliver value to Coca-Cola Amatil's shareholders.

The COVID-19 pandemic presents a perfect time for Coca-Cola European Partners to go ahead with this transaction, which creates a cross-border platform for accelerated growth and returns.

Motley Fool contributor Miles Wu has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the shares mentioned. 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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