Not Everything Goes Better With Coke

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This story features CUSCAL LIMITED.
For more info SHARE ANALYSIS: CCL
The company is included in ALL-ORDS and ALL-TECH

 By Greg Peel

Over the past twelve months or more, speculation has been rampant about further consolidation in the Australian beverages market – both alcoholic and non. The financial crisis has been a bit of a distraction, but also further impetus. Among the players have been ubiquitous soft drink leader Coca-Cola Amatil ((CCL)), robust Kiwi brewer Lion Nathan ((LNN)), and failed beer-wine merger monster Foster’s Group ((FGL)). And then we throw in any number of offshore brewers, vintners and fizzy-drink peddlers.

Attention has centred on who might have a swing at any bits of Foster’s as the once iconic company struggles to come up with a strategy for the future. Lion Nathan was never in the game, given competition issues. But Coke has been looking to meaningfully expand into the fairly safe Australian alcohol market for years. Would Coke make some sort of play for Foster’s?

Well never mind, Lion has turned the tables. The Kiwi yesterday threw a mixed cash and scrip offer on the table for Coca Cola Amatil which equated to $10.21 compared to $8.28 at the previous close of trade. This set the CCL share price on fire in an otherwise weak market.

The first response from analysts is that $10.21 was never going to be enough, despite the premium. And it didn’t take long for CCL management to reject the bid as undervaluing the local operation. US parent and 30% stake holder, The Coca Cola Bottling Company (TCCC), was uninterested, and it is known that TCCC has an aversion to the marriage of soft drink and beer (don’t we all) despite CCL having poked around the market for years.

In order to fund the deal, Lion Nathan would place what amounts to a 27% stake in the merged group with its major shareholder, Japanese brewer Kirin, at $11.50. So at this stage it’s $11.50 for Kirin and $10.21 for everyone else.

Analysts agree that the Lion offer undervalues CCL, and that if Lion wants to gain control of the boardroom it would need to pay more like $11.00-11.80. So – do we have a ding-dong takeover battle on our hands, a la BG and Origin Energy? Should we all jump in?

No, say the analysts. While there are clear advantages for both sides in a merger, the synergies will be tight and the debt burden uncomfortable were Lion to pay the higher price. It is questionable whether this is a fishing trip of a bid or an all-in, take it or leave it offer.

Whether or not Lion might increase its offer, analysts agree that the complexities of such a merger will mean months and months of assessment by various regulatory bodies, including competition commission and foreign investment boards in both Australia and New Zealand. Were the merger to go ahead, Kirin would back-door a big stake in such local names as National Foods, Dairy Farmers and Berri. Lion Nathan shareholders would have to approve the premium being effectively paid to Kirin for the funds, and TCCC would have to agree to sell its stake in CCL to a brewer, which goes against its beliefs.

Citi was the only broker to downgrade CCL this morning – from Buy to Hold based on yesterday’s share price jump. The B/H/S ratio remains at a reasonable 5/4/1, but the Buy-raters are more keen on Coke as a defensive soft drink seller in a weak market than a takeover play. The brokers’ average target price has only crept up from $8.99 to $9.09, indicating a lack of faith in the Lion offer succeeding.

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