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Coca-Cola Bottler Merger: Benefits for CCE and KO Investors

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Proposed shareholding structure of Coca-Cola European Partners

As per the deal specifics that the companies disclosed, Coca-Cola Enterprises (CCE) shareholders should have a 48% shareholding in the new company, Coca-Cola European Partners (or CCEP). Existing CCE shareholders should receive one share in the new company together with $14.50 in cash for each share held in CCE.

Coca-Cola (KO), by virtue of its 100% shareholding in Coca-Cola Erfrischungsgetränke AG (or CCEAG), will receive an 18% shareholding in the new company. Coca-Cola Iberian Partners (or CCIP) would receive a 34% shareholding in CCEP.

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Leverage

CCEP plans to issue $3.3 billion in debt to fund the cash payment to CCE shareholders. This would raise the projected adjusted net debt-to-EBITDA[1. Earnings before interest, taxes, depreciation, and amortization] to 3.5x for the new company. The companies expect to reduce this figure to 2.5x by the end of 2017 with a long-term target of ~2.5x–3.0x.

CCE’s debt is rated investment-grade. The company had a long-term credit rating of BBB+ from Standard & Poor’s and A3 from Moody’s as of the end of December 2014.

CCE currently employs slightly higher leverage compared to its peers in terms of total debt to total assets. With total debt at 46.3% of total assets, CCE’s leverage is higher than Coca-Cola FEMSA’s (KOF) at 31.1% and Coca-Cola Amatil’s (CCLAY) 43.6%. Coca-Cola HBC (CCHGY)(CCH.L) has a comparable metric of 29.2%.

In comparison, Coca-Cola (KO), PepsiCo (PEP), and Dr Pepper Snapple (DPS) have total-debt-to-assets ratios of 45.4%, 41%, and 31.2%, respectively. The S&P 500 Beverages Industries Index (XLP) has an average ratio of 42.8%.

Growth considerations

CCEP’s over 50 manufacturing plants should give it room to maneuver with regard to production. But should the need for expansion capital arise in the future, higher leverage may limit the company’s ability to raise debt at advantageous rates in the near term. It may also limit financing of inorganic growth using cheaper debt capital.

KO and CCE are part of the portfolio holdings in the iShares S&P 500 Value ETF (IVE), together constituting 0.9% of the portfolio.

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