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Out of the bottle

1 October 2014 By Kevin Allison

Coca-Cola’s challenge goes beyond revising its controversial equity compensation plan. The beverage giant’s retreat from the scheme is a win for Warren Buffett, investor David Winters and the company’s other shareholders. But the quibbles with Coke don’t end with excessive remuneration.

Winters can claim partial vindication, having led an unsuccessful campaign to overturn Coke’s original plan before the annual meeting in April. That plan called for awarding shares to roughly 6,000 eligible employees over four years. Now the company will stretch equity grants over a decade, reducing the number of shares handed out each year and favoring cash and stock awards over options grants.

It’s a significant concession that still lacks detail. Coke will supplement the equity awards with cash, and the number of shares approved for distribution won’t change. So current shareholders will end up being diluted anyhow, though over a longer period of time.

The company will also continue to offset the additional shares with buybacks. That’s a pointless exercise, since the money spent on repurchasing stock belongs to shareholders.

Coke boss Muhtar Kent can’t rest easy, even if he manages to quash debate over the equity plan. Winters offers a litany of complaints, from the combination of the chief executive and chairman roles to stagnant profit margins. He said on Wednesday that Coke’s move calls “the competence and leadership” of the board and management into question.

Kent and the directors still have one heavyweight on their side, though. Buffett’s Berkshire Hathaway is Coke’s largest shareholder, and the Oracle of Omaha has tempered his own qualms about the equity plan with a reluctance to criticize management.

That leaves excessive costs as the logical next target. The soda maker’s operating margin was 27 percent of revenue last year. That’s better than rival PepsiCo’s 15 percent operating margin but well short of beer maker Anheuser-Busch InBev’s 33 percent, which Winters believes is a worthy goal for Coke.

The company did, in fact, announce a $1 billion cost-cutting plan earlier this year. But analysts at Bernstein have calculated Coke could save up to $4 billion annually just by bringing its expenses in line with its consumer goods peers. With numbers like that floating around, the company could struggle to put pesky activists back in the bottle.


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