Breakingviews - Coke bottler serves up flat cross-border deal

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MELBOURNE/LONDON (Reuters Breakingviews) - Having two Cokes together may be as bad an idea financially as it is for health reasons. Coca-Cola European Partners has offered to buy Australian bottling peer Coca-Cola Amatil for about $6.2 billion. There are few synergies to help justify the premium on offer, leaving a return on investment that lacks fizz.

Europe’s main distributor of the iconic soda and other bubbly beverages has been chasing its smaller counterpart for over a year. It finally landed on a price tag that Amatil’s board and boss Alison Watkins could recommend. CCEP, in which Coca-Cola owns a 19% stake, is touting “geographic reach and scale”.

The appeal for CCEP boss Damian Gammell is exposure to Australia and New Zealand, which offer better growth prospects than Europe. Amatil also bottles a broader range of beverages. Diversifying into coffee and alcohol makes sense when consumers and governments are increasingly suspicious of sugary drinks. By the same token, however, empire-building in mature markets looks more questionable.

Removing Amatil from the public market would save a few bucks but there’s probably little else in the way of deal-related savings. What’s more, the company is already spending heavily to try and wring out A$85 million of costs, much of which it’s likely to plough back into the business.

Coca-Cola is helping smooth the way by accepting a discount on about a third of its 31% Amatil stake, and the undisturbed price for the rest. With CCEP willing to pay a 19% premium in cash to other shareholders, the target’s enterprise value is about A$10.8 billion, or $7.7 billion.

A quarterly update accompanying news of the transaction on Monday suggests a rebound at Amatil has begun. Analysts expect the company to return to its pre-pandemic level of earnings before interest and taxes in 2022, according to estimates gathered by Refinitiv. Tax that A$635 million and divide it by the offer, and CCEP would generate a return of just over 4% on its investment, according to Breakingviews calculations. Amatil’s weighted average cost of capital is closer to 8%.

Some Amatil shareholders might squawk that in February the stock price briefly exceeded what’s on offer now. Given a healthy takeover valuation of 14 times forecast 2020 EBITDA and the buyer’s seemingly stretched logic, it might be tough to extract something sweeter.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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