Coca-Cola Keeps AB InBev At An Arm’s Length; Buys Stake From The Brewer In African Bottling Plants
For months it has been speculated that the world’s largest brewer Anheuser-Busch InBev (NYSE:BUD) could look to follow its acquisition of the then world’s second largest brewer SABMiller with the acquisition of the beverage giant The Coca-Cola Company (NYSE:KO). AB InBev completed its merger with SABMiller in October, and with it, the former took control of SABMiller’s former 54% stake in Coca-Cola’s largest African bottling company, Coca-Cola Beverages Africa, which distributes ~40% of Coca-Cola’s volumes in the continent.
But Coca-Cola has now agreed to buy AB InBev’s stake in Coca-Cola Beverages Africa for $3.15 billion. The beverage company had said in October that it planned to exercise a change-of-control clause for its African business, which it plans to refranchise to other partners. Coca-Cola Beverages Africa has operations in 10 countries across Eastern and Southern Africa, including more than 30 bottling plants. In addition to SABMiller (now merged with AB InBev), Coca-Cola and the South African Gutsche Family Investments own the rest of the stake in Coca-Cola Beverages Africa. [1] Coca-Cola will also separately buy AB InBev’s interest in bottling operations in Zambia, Zimbabwe, Botswana, Swaziland, Lesotho, El Salvador, and Honduras. Both the deals between Coca-Cola and AB InBev are subject to relevant regulatory and minority approvals, and are expected to close by the end of next year.
Coca-Cola also plans to refranchise these operations, in a bid to move away from the capital intensive and low margin business of bottling, and focus more on the concentrate business as the consumption of carbonated drinks continues to slow down, especially in developed markets. Coca-Cola’s net sales growth has been hurt in the last few quarters by structural changes. The beverage company is moving away from a capital-intensive organization with its intended refranchising plans for North America, China, and structural changes in Europe and Africa. The company is looking to refranchise two-thirds of its bottling territories in North America by the end of 2017, and a substantial portion of the remaining territories no later than 2020, in a bid to move away from the capital intensive and low-margin business of distribution. All this in hopes to improve operating performance. Coca-Cola signed six definitive agreements and closed four transactions recently, thereby remaining on track to complete its refranchising efforts in North America by the end of 2017.
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A bottling business comes with four to five times more revenue per drink sold and the accompanying cost. Thus, any impact on the sales of the bottler is going to have a magnified impact on overall sales for Coca-Cola and much less effect on the company’s profits. The company might have witnessed a decline in revenue due to its refranchising activities, but it has been able to maintain solid margin through the first three quarters of the year boosted by increased pricing, favorable geographic mix, lower commodity costs, and productivity initiatives. The company’s operating margin rose to 22.4% through September, up 140 basis points year-over-year.
The deal between Coca-Cola and AB InBev somewhat pours water over speculations of a possible takeover of Coca-Cola by the world’s largest brewer in the near future. Another conflict of interest was AB InBev’s bottling and distribution deals with PepsiCo in Latin America. While Coca-Cola will buy out its stake from AB InBev, keeping the latter at an arm’s length, AB InBev still has a stake in Coca-Cola’s bottling operations. The brewer’s takeover of SABMiller also gave it a 20% stake in the French company Castel Group, which is a bottler for Coca-Cola in more than 12 countries in Africa.
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