Coca-Cola to Buy SABMiller’s Stake in African Bottler

SABMiller’s 54% equity stake in CCBA is valued at about $4 billion

c1The Coca-Cola Co. (NYSE: KO) announced that it would exercise a change-of-control clause, allowing it to buy SABMiller PLC’s stake in Africa’s biggest Coke drinks bottler, Coca-Cola Beverages Africa (CCBA), as reported by The Wall Street Journal on October 10th, 2016. The announcement comes after Anheuser-Busch InBev’s (AB InBev) closed its much anticipated over $1 billion merger with SABMiller on October 10th, 2016. Coca-Cola wants to exercise its change-of-control clause amid industry speculations that AB InBev could eventually try to acquire it. AB InBev is also a major bottler of non-alcoholic drinks in Latin America for Coca-Cola’s long-time rival PepsiCo Inc. (NYSE: PEP). Coca-Cola will negotiate terms of the deal with AB InBev in the coming months and scout for potential partners to refranchise CCBA.

As of late August 2016, SABMiller held a 54% stake in CCBA, which distributes about 40% of Coke’s volumes in the continent. Coca-Cola normally keeps change-of-control clauses with its bottling partners globally, giving it the right to buy out a partner’s share if the partner is acquired by a third party. SABMiller’s equity stake in CCBA is valued at about $4 billion.

The South Africa-based CCBA operates bottling plants spanning 11 countries with plans to expand to 14 countries. It has more than 30 bottling plants in 12 markets spanning southern and eastern Africa. Coke set up CCBA along with SABMiller and the South Africa-based owners of bottler Coca-Cola’s Sabco in 2014, at which time it estimated that the new bottling entity had $2.9 billion in annual revenue and $505 million in earnings before interest, tax and amortization. While Coke owns 11.3% stake in CCBA, SABMiller holds 54%, and the Gutsche Family Investments that owns Coca-Cola’s Sabco holds the remaining stake.

Coca-Cola has hundreds of bottling partnerships around the world including Coca-Cola FEMSA in Mexico and Latin America, Coca-Cola HBC AG and Coca-Cola Enterprises in Europe. Potential partners for CCBA could be Europe-based Coca-Cola European Partners PLC and Coca-Cola Hellenic Bottling Co. or Mexico’s Coca-Cola Femsa SAB.

Coca-Cola’s asset-light strategy

Coca-Cola has been divesting manufacturing and distribution assets worldwide as part of its “asset light’’ strategy to focus on its more profitable concentrate business at a time when soda consumption is slowing. The Company is facing mounting challenges in the form of a consumer backlash for carbonated beverages. In recent years, consumers are increasingly shifting away from both sugary drinks and artificially sweetened beverages citing health concerns. Since soda drinks contain zero nutrition, excessive sugar and caffeine, thereby increasing diabetes and other related health risks.

Health-conscious consumers shun soda

As health-conscious Americans shun soda, carbonated beverage makers are consciously making a shift away from sugary, bubbly drinks in favor of healthier beverages such as instant fruit juices, fruit blends, and flavored waters. According to Beverage Digest, the per capita soda consumption in the U.S. tumbled to a 30-year low in 2015. The total carbonated soft drink volumes fell for the 11th straight year in 2015; further declining 1.2% from 2014’s 0.9% drop.

c2This trend is especially bad news for Coca-Cola, which derives almost 75% of its global sales volume from carbonated soft drinks. Coca-Cola is instead looking to focus on energy drinks instead and plans to roll out Coca-Cola Life, a moderate-calorie version sweetened with stevia plant extract, across more countries, after releasing the drink in Argentina and Chile in 2015.

Philadelphia introduces soda tax

Bowing down to consumer backlash on carbonated beverages, Philadelphia became the first major U.S. city to pass a tax on soft drinks on June 16th, 2016, dealing a significant blow to the soft drinks industry. People who buy sugary drinks will have to pay an additional 18 cents in tax for each 12-ounce can of soda and $2.16 in tax for each 12-pack purchased. Philadelphia will start collecting the tax from January 1st, 2017. Drinks that will not be taxed are those that are more than 50% juice or milk. Coca-Cola has cause for worry because soda tax proposals are being discussed in San Francisco and four other cities, and two states, Alabama and Illinois.

Partnership with Dunkin’ Donuts

c3After being hit with soda tax, Coca-Cola is looking to add to its products basket in another fast-growing category – bottled coffee. To this end, the Company announced on September 29th, 2016, that it has teamed up with Dunkin Brands Group Inc. (NASDAQ: DNKN) to launch bottled coffee drinks. The market of bottled iced coffee drinks has been growing steadily in the U.S., surging 8% in 2015, with an estimated value of $2.3 billion in sales. In 2016, this market is expected to grow by about 8%. To tap this market opportunity, Coca-Cola hopes that creating beverages with Dunkin’ coffee may prove to be key in helping both companies compete against their market rivals. Bottled coffee has become popular since 1996, when Starbucks Corporation (NASDAQ: SBUX) launched its first bottled Frappuccino, making it the leader in this market category.

Moving ahead, Coca-Cola could face headwinds over predictions that the global economy may contract amid a slowdown in China, recession in major markets such as Brazil and Russia, and uncertainty in the Brexit aftermath. It remains to be seen if Coca-Cola has diversify its product range to partially offset the fall in revenue generated by its fizzy drinks.

Stock Performance

c4Coca-Cola’s stock ended the day at $41.76, falling 0.05%, at the close on Thursday, October 13th, 2016, having vacillated between an intraday high of $41.89 and a low of $41.51 during the session. The stock’s trading volume was at 17,634,407 for the day. The Company’s market cap was at $180.15 billion as of Thursday’s close.

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