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What Coca Cola Enterprises' Merger Means for Investors

By Nicholas Rossolillo - May 20, 2016 at 9:11AM

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The deal affects Europe's largest bottler of Coca-Cola beverages.

Image source: Coca-Cola Company.

Last summer, Coca-Cola Enterprises (NYSE: CCE) announced a proposed merger with Coca-Cola Iberian Partners (based in Portugal and Spain) and Coca-Cola Erfrischungsgetränke (based in Germany) to create a new company, Coca-Cola European Partners. With shareholders set to vote on the merger on May 24, here's what investors need to know about the proposed deal.

What the new company will look like

The new company, Coca-Cola European Partners, would have a territory covering virtually all of Western Europe, and it would become the world's largest bottler of all things Coca-Cola as measured by sales volume. Based on of the individual 2015 numbers from Coca-Cola Enterprises, Coca-Cola Iberian Partners, and Coca-Cola Erfrischungsgetränke (yes, that is the correct spelling!), three-quarters of sales for the new company will come from Great Britain, Germany, France, and Spain, with the remaining sales coming from nine other European countries.

Combined 2015 sales of the individual companies were just over $12 billion in U.S. dollars, and profit was just over $700 million for the year. The combined territory of the bottlers serves more than 300 million people.

Much of Coca-Cola Enterprises leadership team will remain intact at the new company. Current CEO and chairman John Brock will become the new CEO and director, while chief operating officer Damian Gammell and chief financial officer Nik Jhangiani will both remain in their current roles. Victor Rufart, managing director of Iberian Partners, will become the new company's chief integration officer to oversee the merger.

Image source: Coca-Cola Enterprises.

Why combine these three businesses?

The companies see two benefits to a unification of efforts: cost savings and a boost in sales growth. Over the next three years, total operating expenses are to be reduced by $350 million to $375 million, which would equate to about 3% of 2015 net sales. With 2015 net profits at $700 million, this development could increase profits by over 50%.

The companies also believe that combining operations will help them be more competitive in developed Western Europe, stave off competition from other beverage providers, and drive Coca-Cola sales growth and distribution. Coca-Cola Enterprises has seen sales fall in recent years, with 2015 totals coming in 1.5% lower than 2014.

The hope is that the new company will be more competitive in its respective markets than the three companies can be individually. That is the extent of the new outlined business plan. Details on how the deal decreases costs and increases the competitiveness of the business haven't been released, so look for some more color on that if investors give the nod of approval.

What it means for investors

The merger of the three companies into Coca-Cola European Partners is expected to close by the end of June, with the new shares trading on both the New York Stock Exchange and the Euronext Exchange. Owners of Coca-Cola Enterprises will receive one share of the new company for each share of CCE owned, plus a $14.50 cash distribution. It is important to keep in mind, though, that this cash distribution is not a reason to buy CCE before the merger, as the new share price will be adjusted down accordingly to reflect the cash payment.

Owners of Coca-Cola Enterprises may also be concerned with the fact that the headquarters of the new company will be in Great Britain instead of the U.S. Based on current tax codes, no foreign tax will be assessed on potential future dividend payments or capital gains. It is possible, however, that a taxable event could be realized at the time of the merger if the value of the new shares plus the $14.50 cash distribution is greater than an investor's original purchase price of CCE.

Coca-Cola Enterprises currently pays a dividend yielding about 2.3%. It is unknown if the new company will resume a dividend right away, although those involved with the merger have stated the new board of directors' intention to pay out 30% to 40% of net profits over the long-term. Start looking for some more detail on this topic from management after the shareholder meeting on May 24.

Owners of the Coca-Cola Company (NYSE: KO) will also be affected by the transaction, though in a more indirect way. The German bottling business is a wholly owned subsidiary of the Coca-Cola Company, and should the merger happen, Coca-Cola will own an 18% stake in Coca-Cola European Partners.

This transaction helps the parent Coca-Cola business execute on its stated strategy of divesting itself of bottling and distribution and focusing instead on the development of new drink offerings. As a result, the Coca-Cola Company could end up being the biggest beneficiary of the whole deal if the transaction goes through.

Ultimately, current owners of the Coca-Cola Enterprises bottling company have a few things to consider. The first is whether taxes might be an issue during the exchange of the old shares for the new ones. The second is the long-term growth prospects of the new company and the sustainability of the dividend payments.

It appears the board will attempt to keep the cash flowing to shareholders and that expense savings will be realized over time to strengthen profits, so I would expect no surprises with the dividend over the long-term. The merger documents do mention some risk regarding short-term cash flows right after the transaction takes place that could potentially interrupt cash payments to shareholders.

For new investors who may have gotten interested in the business because of the merger, I don't think there is enough clarity on a future business strategy in the merger documents to warrant a purchase just yet. At this point, the transaction appears to be a plan to consolidate business in the hopes of reducing costs.

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