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Bursting bubbles

26 October 2020 By Jeffrey Goldfarb, Dasha Afanasieva

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.

 

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