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.
