The Simple Reason Why Buffett Can't Acquire Coca-Cola

As Fed officials wrapped up the first day of their two-day June monetary policy meeting, U.S. stocks finished slightly higher on Tuesday, with the benchmark S&P 500 and the narrower Dow Jones Industrial Average (DJINDICES: ^DJI  ) both gaining 0.2%, while the technology-heavy Nasdaq Composite Index (NASDAQINDEX: ^IXIC  ) rose 0.4%. Dow component Coca-Cola (NYSE: KO  ) outperformed the broad market today with an 0.6% gain, as a well-respected value investor told the Fox Business network he has written to the company's board to express his concern that another very well-respected value investor, Berkshire Hathaway (NYSE: BRK-A  ) (NYSE: BRK-B  ) CEO Warren Buffett, could be planning to take Coca-Cola private in a "sweetheart" deal. Is the idea credible?

The original claim comes from David Winters, the CEO of Wintergreen Advisers, who believes that Berkshire's takeover of H.J. Heinz with Brazilian investor 3G Capital is a template for a leveraged buyout of Coca-Cola, adding, "We are concerned that a similar type of sweetheart, insider deal for Coca-Cola could, in our opinion, significantly undervalue Coca-Cola and irreparably harm Coca-Cola shareholders."

CNBC then reported that Buffett had refuted the notion. Becky Quick, one of Buffett's favored journalists, said:

I immediately called Buffett just to see what he thought about it... He said there is absolutely no chance of that -- he was completely resolute. He asked me to repeat myself; I think he thought it sounded pretty crazy, too.

To see why it sounds "pretty crazy," let's run through a few simple numbers. Even if a deal to take Coke private were financed with debt amounting to seven times EBITDA, or earnings before interest, taxes, depreciation and amortization – toward the upper end of leverage levels being practiced in the current leveraged buyout environment – that would only cover $92 billion in financing.

That figure is equal to slightly more than half of Coke's current market capitalization ($180 billion), leaving investors to stump a massive slug of equity to get the deal done. And that's before you tack on an acquisition premium on top of Coke's current price. (There is one countervailing factor: Berkshire already owns $16.4 billion worth of Coca-Cola's equity.)

Even for an elephant hunter like Buffett, that looks like too big a prey, even if he were to team up with 3G Capital. At the end of March, Berkshire had $42 billion in cash on its balance sheet (incidentally, the investment at H.J. Heinz is valued at a bit more than $12 billion). Keep in mind, however, that Mr. Buffett wants to keep a minimum of $20 billion of cash on hand at all times as a hedge against unexpected losses in the insurance/reinsurance business.

Warren Buffett would love for Berkshire to own Coca-Cola outright rather than simply being its largest shareholder -- if it could. Only last March, he told CNBC, "Our preference at Berkshire is to keep buying operating – big operating businesses." However, Coke is simply too big for an acquisition to be feasible – leveraged or otherwise. Mr. Winters is correct, however, that the Heinz acquisition is a template for future deals, and Buffett would be happy to work with 3G Capital again; he could, at least, toast the closing with a Coke.

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