If Coke Follows Pepsi's Bottling Roll-Up (PEP, PAS, PBG, KO, COKE, CCE, KOF, CCH

This morning’s news of Pepsico Inc. (NYSE: PEP) offering to acquire bottling affiliates PepsiAmericas Inc. (NYSE: PAS) and Pepsi Bottling Group Inc. (NYSE: PBG) may be a surprise to some, but it is far from a shock.  Having multiple companies processing different parts of the same business may not be the most efficient model under certain circumstances.  Interestingly enough, The Coca-Cola Company (NYSE: KO) has a similar structure with affiliated entities that are outside publicly traded stocks.

Coca-Cola Bottling Co. Consolidated (COKE), Coca-Cola Enterprises Inc. (NYSE: CCE), Coca-Cola FEMSA S.A.B de CV (NYSE: KOF), and Coca-Cola Hellenic Bottling Company S.A. (NYSE: CCH) are all affiliated companies.

Pepsico (NYSE: PEP) shares are down over 4% at $50.02 today.  A $6 billion buyout compares to a new market cap of almost $78 billion.  The Coca-Cola Company (KO) is down 2.4% with the broad market today and in sympathy with Pepsi.  It would be a kid’s game to only hang your hat on the 17% that Pepsi is offering to see if Coke would do the same, but this is somewhat uncharted and has to start at least somewhere.  We wanted to take a look at what an implied 17% gain would like for Coke’s affiliated entities.

Coca-Cola Bottling Co. Consolidated (NASDAQ: COKE) is based in Charlotte, NC and is into the production, marketing, and distribution of carbonated nonalcoholic beverages primarily of Coca-Cola.  Operations are throughout the Central East Coast and parts of the Southeast. Its shares are up 1% at $54.28 and its market cap is just shy of $500 million.

Coca-Cola Enterprises Inc. (NYSE: CCE) is also based in Atlanta, GA and is in the manufacturing, distribution, and marketing of nonalcoholic beverages and offers its products principally under the Coca-Cola classic, Sprite, Dasani, POWERade, Coca-Cola, Diet Coke/Coca-Cola light, Fanta, Coca-Cola Zero, and Capri-Sun brand names.  It sells through wholesalers and retailers primarily in North America, the U.K. and Europe.  Its shares are up 3% at $15.39 and its market cap is $7.5 billion.

Coca-Cola FEMSA S.A.B de CV (NYSE: KOF) is based in Mexico, City which is a bottler of Coca-Cola trademark beverages in Latin America.  If you have forgotten, this is one of the rather large Bill Gates holdings.  FEMSA’s market cap is $6.73 billion and its shares are down 3.5% at $36.47 today.

Coca-Cola Hellenic Bottling Company S.A. (NYSE: CCH) is based in Athens, Greece and it produces, distributes, and sells non-alcoholic beverages under a franchise of the Coca-Cola name serving approximately 550 million people in 28 countries throughout Europe, Eastern Europe, and Russia.  Hellenic’s stock is off almost 4% at $15.32 today and its market cap is $5.6 billion.

Pepsi has said that this will become accretive to earnings and will streamline its operations.  It is very possible that the same could come true for Coca-Cola.  The problem is that this would come with a much larger price tag.  Just like Pepsico, it also holds interests.  That means that it would not all be entirely add-on capital to the market caps with a 17% premium in simple math.  But if you tally up the US-equivalent of the stated market caps of the Coca-Cola bottling and distributing its goods comes to a whopping sum in excess of $21 billion.  That is before backing out the company’s interest, but that is also before lumping in a premium to the share prices.

Coca-Cola’s market cap is just north of $102 billion.  That would put the entire tab at a much higher price nominally.  Both Pepsi and Coca-Cola are still closer to their 52-week lows than they are to their respective highs.  Both should easily have access to the capital markets, particularly if the deals can be financed as a streamlining of operation or for more efficiency.  It looks like it is just a lot cheaper for Pepsi to do this over what it would cost Coca-Cola.

Stay tuned.

Jon C. Ogg
April 20, 2009

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