Beverages
Eluding While Aligning: Potential Bottler Implications of KO's Africa Decision
Jefferies global beverage team collaboratively views CCE and CCH as likely
beneficiaries from KO’s decision to exercise its option to buy ABI's stake in the
Coca-Cola Beverages Africa (CCBA) JV. CCH is best positioned to acquire the
stake, which could drive upside to our £21 PT, and we reflect potential value
from a sale of its W. Euro. territories as part of the deal structure in our €37 PT
for CCE. CCH is our preferred way to play this theme.
CCH likely better positioned than CCE for ABI’s stake in CCBA: While both CCE and
CCH are likely to express interest as KO refranchises ABI’s stake in CCBA, which we value at
€4-5 billion (12-15x EV/EBITDA), we believe that the latter is likely better positioned given
its expertise in EMs, including Nigeria.
Very plausible that CCH’s W. European territories may go to CCE as part of KO’s
bottler alignment strategy: This would serve two purposes: (i) further align the Coke
system's bottling footprint in W. Europe as CCE acquires distribution rights in contiguous
countries (Ireland/Switzerland/Austria/Italy); and (ii) help CCH finance a potential CCBA
stake (2.3x debt leverage including sale of W. Europe territories, 4.0x excluding).
KO – keeping the fox (ABI) out of the hen house: CCBA covers 40% of KO’s Africa
volumes (~5% globally). The potential refranchising of ABI’s stake in CCBA to CCH (lower
likelihood to CCE) should have little impact on KO’s performance in Africa. However, we view
ABI, which handles PEP’s distribution in Brazil through AmBev and long-rumored to have
ambitions to acquire KO in a potential mega-deal, as a very capable partner for KO. While
consistent with KO’s bottler alignment focus, the co.’s decision to exercise its option to buyout
ABI’s stake in CCBA can reasonably be viewed as a step toward “playing defense” against
a potential ABI bid longer-term. Our FY16-18 est. and $45 PT for KO remain unchanged.
CCE – edging up PT on M&A optionality, though still too early to get
constructive: We lift our PT to €37 (from €36) and incorporate M&A optionality (acq.
of CCH’s W. Euro. territories as part of deal structure). Our base case suggests 12% EPS
accretion from the acq. of CCH’s W. Euro. territories. Yet, despite the potential for upside
to expectations from M&A, we remain on the sidelines due to the weak macro, difficult
competitive env't, and GB excise tax risk. Trimming FY16-18 est. on recent GBP weakness,
though lifting PT to €37 ($40 USD) on 50/50 weighted fundamental/strategic outcome.
CCH – attractive without M&A, though CCBA represents upside optionality: We
see merit to the purchase of ABI's stake in CCBA owing to potential EPS accretion (5-11% in
year three), as well as likely multiple expansion as leverage to higher growth EMs increases
markedly (Africa to 63% of profits from 9%, including sale of W. European territories to CCE).
We remain positive on CCH even in the absence of a major transformational deal as focus
likely turns to bolt-on acquisitions, higher returns to shareholders, and an attractive recovery
story driven by: (i) an improving topline and margin outlook; (ii) greater alignment with KO;
and (iii) balance sheet optionality. Our FY16-18 est. and £21 PT are unchanged.
3Q an unlikely catalyst for KO, which reports on Wed. (10/26): Likely constrained
by EM weakness reported across global consumer staples this earnings season, we