‘Uncertainty’ helps Coca-Cola Amatil decide to back $9.3bn takeover
Coca-Cola Amatil defends conditionally backing European Coke’s offer, despite some labelling it opportunistic and undervalued.
The Coca-Cola Amatil double act of chairman Ilana Atlas and chief executive Alison Watkins has enthusiastically endorsed a $9.3bn takeover by the world’s biggest Coca-Cola bottler, as earnings uncertainty heading into next year made the overseas takeover too good to refuse.
It means Australian investors are likely to soon lose ownership of a strong portfolio of beverage brands led by powerhouse Coca-Cola and including Mount Franklin bottled water, Goulburn Valley juice as well as an occasionally ill-fitting collection of beer, spirits, dairy and coffee products.
The market will also lose a diversified consumer staple stock, while for the leading grocery retailers such as Woolworths, Coles and convenience stores, it will see them dealing with a much more powerful supplier based in Britain that will further cement its position as the largest Coca-Cola bottler in the world by volumes.
The takeover by Coca-Cola European Partners unveiled on Monday importantly has the blessing of the powerful US parent company The Coca-Cola Company (TCCC), with the Atlanta-based drinks maker so keen to see the deal done it will accept a heavy discount to the all-cash offer of $12.75 a share for its 30.4 per cent stake in CC Amatil.
It will pocket as little as $9.57 a share for one third of its CC Amatil stake and potentially role the rest into growing its current 19 per cent share in Coca-Cola European Partners.
This sacrifice effectively leaves as much as $600m value on the table but underlines its eagerness for CC Amatil to be absorbed into the Coca-Cola European Partners empire that it is willing to act like a “bank of mum and dad” for the European bottler. The deal has been recommended by CC Amatil’s independent directors, which excludes the directors on the board that represent TCCC.
Shares in CC Amatil, which were placed in a trading halt on Friday, leapt on the news and ended up $1.75, or 16.28 per cent, at $12.50. This has seen the CC Amatil share price return to close to $13, where it was trading before the COVID-19 pandemic emerged in March.
CC Amatil also updated the market on Monday on its improving sales, which showed some recovery in its trading over the third quarter, including its flagship Australian drinks arm, as customers fresh out of lockdowns resume their normal purchasing behaviour of drinks from restaurants, cafes, bars and convenience stores. The update reported that third-quarter revenue was down 4.2 per cent, an improvement on the 9.2 per cent decline for the first half of the 2020 calendar year. Volume had also improved from an 11.6 per cent fall in the first half to a 5.4 per cent decline by the third quarter.
But Ms Atlas and Ms Watkins stressed at an investor conference on Monday the premium in the Coca-Cola European Partners offer could eclipse the hopes of CC Amatil’s forecasts into 2021 and beyond, as the bottler dealt with volatility around COVID-19 and the anaemic Australian economy.
The chairman and CEO also pushed back against some analyst and investor angst that the price tag of $12.75 was too low and that the approach by Coca-Cola European Partners was opportunistic.
Ms Atlas has defended the board’s decision to conditionally back the $9.3bn takeover from Coca-Cola European Partners, arguing the high level of uncertainty heading into 2021 helped tip the scales to supporting the offer.
At the investor conference on Monday, Ms Atlas revealed it was not the first time Coca-Cola European Partners had approached CC Amatil with a takeover proposal, with previous offers incomplete and underpriced, but after assessing the Australian bottlers’ earnings prospects into 2021, despite the better third-quarter performance, it was decided to recommend the offer to shareholders.
“We considered a range of factors in determining what we thought was fair and reasonable for independent shareholders,’’ Ms Atlas said.
“As to the position in 2020, we did consider 2020 obviously and the current environment, but we also considered the future as well. We considered the trading update, what earnings would be in 2021 and through to 2022 — clearly it is positive but there are also significant risk factors as well and a great deal of uncertainty.
“And that uncertainty heads into not just the short term but the medium term as well, so in analysing this we had to factor in a huge number of data points to come to a judgment what we thought was in the best interest of shareholders in terms of a price.’’
Ms Atlas said the CC Amatil board considered the recent trading history of the company, including trading around $13 before COVID-19 hit, but still backed the takeover offer that was below that level.
“I think certainly we did reach a price around $13 in February but it wasn’t sustained and I think when we considered all the factors — so obviously the current environment, future environment in the discounted cash flow analysis — plus we considered the premium on offer.
“And we felt on that basis, with all those considerations, that it was a good price.”
Ms Atlas was backed up by Ms Watkins, who joined the company six years ago to help arrest years of underperformance and improve its sometimes prickly relationship with TCCC, and will now be considering her future at the bottler if the takeover is successful.
Ms Watkins was not disappointed she might not be able to see out her recovery plan for CC Amatil, but pointed to the strong premium being dangled in front of CC Amatil shareholders.
“In these kinds of roles you need to do what is right for shareholders, and I think the price that is in this proposal reflects a good expectation of that kind of recovery and improvement as well as all the hard yards we have done in recent years — so that’s just the way it goes,’’ Ms Watkins told The Australian.
CC Amatil chief financial officer Greg Barnes added that its shares had only traded above the $12.75 offer price from Coca-Cola European Partners twice in the past five years. He said in terms of valuations for other Coca-Cola bottlers, they were valued at around 14.5 times earnings for the 2019 calendar year and a forecast of 11-12 times for the 2021 calendar year. This compared to the offer price from Coca-Cola European Partners that valued CC Amatil at 17.3 times 2019 earnings and 19 times analyst consensus for 2021.
Under the terms of the deal, an all-cash offer will be made to independent shareholders (excluding TCCC) of $12.75 a share, less any final dividends in respect of the second half declared and paid to CC Amatil shareholders before the date of implementation of any scheme. In a second step of the deal, it is planned that Coca-Cola European Partners will enter into a separate agreement to acquire TCCC’s shares in CC Amatil, and will receive cash of $9.57 a share for 10.8 per cent of its stake and the balance in shares or cash.
There was pushback by some analysts concerned the price was still too low, while Bank of America analyst David Errington questioned why a long and potentially distracting due diligence process now under way was necessary.
“My understanding of the Coke network is they know everything, and they are on top of everything,” Mr Errington said.
“There is going to be a lengthy due diligence and my question is why are (CC Amatil) agreeing to due diligence, why don’t you just say here is the money, here is the bid, put your bid on the table?
“Why is (CC Amatil) allowing what could be a very disruptive due diligence in a very critical trading period that sounds like it could go for four or five months when Coca-Cola, and I’m assuming Coca-Cola European Partners, should know the (CC Amatil) business pretty well anyway?”
Goldman Sachs analyst Andrew McLennan said the trading update from CC Amatil showed improving conditions and sales heading to Christmas.
“(It was) impressive, including those states that have been less impacted by COVID-19, and also recovery in NSW is surprisingly strong,” Mr McLennan said. “There’s lots of positivity from a trading perspective.”
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