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Bubbling discontent

29 July 2014 By Kevin Allison

Warren Buffett adds a degree of difficulty to an activist shareholder’s Coke challenge. Value investor David Winters is now on his second campaign to inject some fizz into Coca-Cola. The Sage of Omaha’s vocal backing of Coke boss Muhtar Kent, though, makes it harder to shake things up.

Coke deserves criticism. Its shares have underperformed the S&P 500 Index by 20 percent since 2010 as Americans have ditched fizzy drinks in favor of healthier alternatives. Coke has not been aggressive enough about cutting costs to adapt.

Agitating at an iconic $180 billion company was never going to be easy, but Buffett’s support gives Coke’s leadership an extra layer of insulation. The soda maker’s biggest shareholder declined to get involved in Winters’ campaign against a dilutive new equity plan this spring, for example, saying he didn’t want to signal a lack of faith in management. Buffett then told CNBC that Kent was the “man to be running Coca-Cola.”

Winters opened a fresh can of complaints after Coke’s lackluster results last week, sharing a letter to shareholders that, among other demands, called for the separation of the chairman and chief executive roles and argued that Coke’s 26 percent pre-tax margin is too low. He reckons it should rival beer maker SAB Miller’s 34 percent showing or even AB InBev’s 40 percent.

The trouble is, he did not offer much in the way of details. Unlike seasoned activist Nelson Peltz’s Trian Partners, which is famous for its lengthy white papers about its targets, Winters only published a three-page note and a couple of 105-second-long videos.

He’s on to something, though. Analysts at Bernstein Research reckon Coke could save up to $4 billion a year by bringing its costs into line with consumer goods peers. That’s way above the $1 billion of cost cuts recently identified by management, and would imply a margin of over 30 percent.

Having Buffett as a major shareholder does not make the company unassailable. Short seller Jim Chanos’s Kynikos Associates went after Moody’s in 2007 before the credit crisis fully hit; the rating agency’s stock plummeted over 70 percent. And Buffett agreed that Kraft was right to break itself up in 2011 after activists including Peltz quietly campaigned for it. A more rigorous analysis of where and how Coke can improve might help get Buffett onside.


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