Despite the fizz, Europe holds firm over Coca-Cola Amatil bid

Coca-Cola European Partners’ is attempting to buy the Australian-listed Coca-Cola Amatil for $9.3bn. Picture: AFP

Coca-Cola European Partners is expected to front investors in Coca-Cola Amatil about its $9.3 billion takeover proposal next month following the delivery of full year results by the Australian listed bottling company.

But those hoping that CCEP will lift its offer on the back of a recent earnings upgrade may face disappointment.

CCEP is expected to argue that the stronger result came largely due to cost cuts and a better-than-expected performance in the PNG and Indonesian markets - ones that are non-core to Coca-Cola Amatil.

They say that the results indicated little change to the performance of the core Australian arm than when the offer was first made.

But analysts at Morgans and Macquarie Group both believe Coca-Cola Amatil’s better-than-expected trading justifies a higher price, with Coca-Cola Amatil’s fourth quarter trading results and 2020 financial year guidance, announced to the market on Friday, being materially stronger than expected.

Analysts at Morgans said following earnings upgrades, its valuation for the stock had risen to $11.43 per share from $10.83 per share previously.

CCEP in October offered $12.75 per share for the company, less any dividend paid, which Morgans expects to be 26 per share.

This was months after Coca-Cola Amatil sales were hit hard by COVID.

A scheme booklet for CCEP’s offer is expected to be sent to shareholders in early March ahead of a shareholder vote.

The Coca-Cola Company based in the United States has a 30 per cent share in Coca-Cola Amatil, and plans to sell its shares into the offer at a discount.

However, CCC cannot vote on the deal and CCEP will need institutional shareholders to be on board.

Following the upgrade, the offer now represents only an 11.5 per cent premium to Coca-Cola Amatil’s valuation, equating to 12 times earnings before interest, tax, depreciation and amortisation to enterprise value or 9.9 times on more normal earnings after a COVID recovery.

In the past, bottling companies have been purchased at between 10 and 12 times, with developed countries at lower multiples and emerging companies at higher multiples given their stronger growth profile.

In the second half of 2020, Coca-Cola Amatil delivered modest earnings growth compared to the previous corresponding period.

“With volumes recovering as COVID restrictions ease and $145m of costs savings targeted by the 22 financial year, we think the business is well placed in the future,” Morgans’ analysts said in a research note.

Morgans analysts said that with the share price trading at a small premium to the offer price, they believed that “clearly the market agrees”.

Coca-Cola Amatil said its preliminary expectations were that the company would deliver ongoing earnings before interest and tax for the 2020 financial year of $550.7m, which is down 13.9 per cent on the previous year.

Ongoing net profit would be $340.3m.

Net debt at December 31 is expected to be $1.462bn, down $289m on the previous year, including $499m of lease liabilities.

The company plans to deliver its results on February 18.

Morgans said that the result was better than its forecast and the business had recovered in the second half of last year as restrictions eased and underlying EBIT rose 3.2 per cent on the previous corresponding period.