Investors hand down verdict on Coke deal

Investors hand down verdict on Coke deal

TCCC has also indicated its enthusiasm for the deal, agreeing to sell one third of its 30.8 per cent stake in Amatil to CCEP at a lower cash price and the balance in return for CCEP shares.

Investors such as Martin Currie Australia, which owns 3.5 per cent of the shares, and Antares Capital, say the offer of $12.75 a share (less any final dividend) is opportunistic and fails to take into account Amatil’s recovery from the coronavirus pandemic.

However, it is understood other Amatil institutional shareholders such as BlackRock and Vanguard support the deal.

Analysts are divided about the merits of the offer.

‘Decent proposal’ but opportunistic?

Citigroup’s head of research Craig Woolford said the takeover premium was “fair not full” and the offer had a 90 per cent chance of proceeding, given CCEB’s bid was pitched at $12.75, a 28 per cent premium to the one-month volume weighted average price.

“As a 30.8 per cent shareholder in Amatil, clearly TCCC would like the deal to proceed,” he said. However, he noted that minority shareholders needed to vote 75 per cent in favour for the deal to be approved and Foreign Investment Review board approval was also required.

Morgan Stanley analysts said the bid was a “decent proposal” but arguably opportunistic, given the hit to Amatil’s earnings in 2020 from COVID-19.

The proposal valued Amatil at – calendar 2019 EBITDA, broadly in line with historic bottler transactions and well ahead of global trading multiples, which are around seven times post-COVID-19 earnings.

” The offer looks in line with precedent bottler transactions, with little scope for competitive tensions,” Morgan Stanley said, citing Atlanta’s decision to sell its 30.8 per cent stake for between $9.57 and $10.34 share, below the $12.75 offered to independent shareholders.

However, JP Morgan analyst Shaun Cousins said CCEP’s offer price ”appears low,” given the rebound in beverage volumes in states where COVID-19 restrictions have eased and after taking into account new cost savings which would help boost earnings in 2021.

Mr Cousins also noted that CCEP was forecast by his colleague, Fintan Ryan, to enjoy around 15 per cent earnings per share accretion if the deal proceeds as planned.

Most major acquisitions are lucky to achieve 1 or 2 per cent EPS accretion in the first year.

“CCEP’s indicative proposal price for independent shareholders is post trading update and cost savings, and recent share price history, raising the risk of shareholders voting against the scheme despite what appears to be a premature board recommendation,” Mr Cousins said.

Morgans analyst Belinda Moore said the timing of the offer was “somewhat opportunistic” given Amatil’s shares and earnings had been hurt by the pandemic, but overall the deal was reasonable.

“While the offer price is in line with other bottler transactions, overall we think this is a good offer for shareholders but it isn’t a knock-out offer,” she said.

“While CCA is now in play and we can’t rule out other interested parties, we do think that a bottler under the Coca-Cola system is the most likely acquirer given the synergies and cross shareholdings,” Ms Moore said.

Macquarie analyst Ross Curran did not opine on the merits of the offer but suggested it was the “end of the line” for Amatil.

“We see limited operational synergies between the two entities with growth in both entities relatively limited at the top line (soft drinks are losing appeal in developed markets); gross margins similar (CCA 36.8 per cent vs CCEP 37.6 per cent ), and EBIT margins only slightly in favour CCEP (13.8 per cent vs Amatil 11.7 per cent,” Mr Curran said.

“However, geographic diversification, and low funding costs globally coupled with lack of organic growth options in the core (European) portfolio provide appeal,” he said. “CCEP also has a proven track record of successfully integrating Coca-Cola bottlers (it is the merger of three conglomerates).”

After surging 16 per cent on Monday to $12.50, CCA shares slipped 10¢ in early trade on Tuesday as investors continued to assess the offer.

The proposal, through a scheme of arrangement, is subject to CCEP completing due diligence and signing a scheme implementation deed. The offer requires approval from 75 per cent of CCA’s independent shareholders and needs clearance from the FIRB, which this year blocked China Mengniu Dairy’s acquisition of Amatil rival Lion Dairy & Drinks.

Sources said the FIRB was unlikely to block the deal, even though food and beverage manufacturing is one of six sectors to receive additional support as part of the Morrison government’s post-recession recovery plan.

“[CCEP] is not Chinese and there won’t be material job losses, except for senior [Amatil] executives,” said one source.

Meanwhile, Moody’s put CCEP’s A3 long term debt rating on review for
downgrade – a move which could increase its borrowing costs – citing potential deterioration in CCEP’s credit metrics and higher leverage if the deal goes ahead.

“Our decision to place CCEP’s ratings on review for downgrade reflects
that, while the acquisition will enhance the company’s business profile,
it would lead to a deterioration in its credit metrics,” said Ernesto
Bisagno, Moody’s senior credit officer and lead analyst for CCEP.

Detailed financing plans for the transaction have not yet been announced but Moody’s expects that CCEP’s adjusted leverage would rise to about 6.0 times earnings from 4.1 times as a standalone company.

Any downgrade of CCEP’s long term ratings would likely be limited to not more than two notches, depending on the capital structure post transaction.

“The review will assess CCEP’s plans to finance the transaction and to reduce debt, as well as the likely timetable for cost savings and the potential for improved operating returns,” Mr Bisagno said.

“While the acquisition of Amatil will weaken CCEP’s financial profile, it
will almost double its consumer reach, creating a broader footprint with
exposure to the mature markets of Australia and New Zealand, growth
markets such as Indonesia and the potential to buy growth in new
geographies in Asia,” Mr Bisagno said.

“In addition, it will enhance CCEP’s portfolio diversification given CCA’s exposure to alcohol and coffee products. However, a large part of the increased consumer reach comes from regions where consumption rate is currently lower than in CCEP’s existing markets.”


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