Coca-Cola Amatil: The hunter becomes the hunted

About the author:

Belinda Moore
Author name:
By Belinda Moore
Job title:
Senior Analyst
Date posted:
26 October 2020, 10:48 AM
Sectors Covered:
Agriculture, Food & Beverage, Travel

  • In light of Coca-Cola European Partners PLC (CCEP) takeover offer for CCL, we set our price target in line with the offer price (login to view target price).
  • In our view, the timing of CCEP’s takeover offer is somewhat opportunistic given CCL's earnings/share price have been impacted by COVID-19. While the offer price is in line with other bottler transactions, overall we think this is a reasonable offer for shareholders but it isn’t a knock-out offer. With volumes recovering as COVID-19 restrictions ease and A$145m of cost savings targeted by FY22, we think the business is well placed in the future.
  • We move to a Hold recommendation.

Overview of CCEP’s takeover offer for CCL

CCEP has made a non-binding indicative proposal, via scheme of arrangement, to acquire 100% of the shares in CCL from independent shareholders (ex. KO) for cash consideration of A$12.75 per share.

Consideration will be less any final dividends CCL may declare. We forecast a final dividend of 22cps, 50% franked. CCEP intends to enter a separate agreement to acquire all of KO’s shares in CCL (30.8%) on less favourable terms.

The proposal is subject to due diligence and agreement of the scheme implementation deed. CCL’s independent directors intend to unanimously recommend the proposed scheme, in the absence of a superior proposal and subject to an independent expert concluding that the scheme is in the best interests of shareholders.

While CCL is now in play and we can’t rule out other interested parties, we do think that a bottler under the Coca-Cola system is the most likely acquirer given the synergies and cross shareholdings. CCEP’s offer continues a trend of consolidation among the Coca-Cola bottlers given the synergies and geographic diversification benefits. Interestingly, the current proposal follows CCL receiving a ‘number of previous proposals’ from CCEP.

Offer price is okay but not a knock-out

The offer is at a 18.6% premium to CCL's last closing price of A$10.75 and a 17.7% premium to our new valuation of A$10.83. Based on our revised forecasts, the offer price represents an FY20 EV/EBITDA multiple of 12.7x or 10.3x on more normalised earnings (FY22 or post COVID-19). Past bottler transactions have been done on about 10-12x EV/EBITDA, with developed countries at lower multiples and emerging countries at higher multiples given their stronger growth profile. 

In our view, the timing of CCEP’s takeover offer is somewhat opportunistic given CCL's earnings/share price have been impacted by COVID-19.

While the offer price is in line with other bottler transactions, overall we think this is a reasonable offer for shareholders but it isn’t a knock-out offer. We also note that the offer price is lower than CCL’s recent share price high of A$13.18 on 21 February.

We believe that CCL is well placed post COVID-19 given it continues to win market share in its key markets and its cost base will be materially lower in the future given it is taking out substantial costs from the business (A$145m of savings are targeted by FY22). This means that CCL should have higher margins in the future.

Investment view – Hold rating

Due to an expectation for a strong Christmas trading period and increased costs savings, our FY20/21/FY22 NPAT forecasts have risen by 0.8%/2.8%/4.6%. Following earnings upgrades, our valuation has risen to A$10.83 from A$10.39 previously.

We set our price target in line with CCEP’s offer price and move to a Hold rating. The key risk to our view is not receiving the necessary regulatory and shareholder approvals.

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