Central Greenwich College

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ABP POST GRADUATE DIPLOMA IN BUSINESS MANAGEMENT

Resit Examinations November 2010

Additional Materials

Coca-Cola Deal Marks Major Shift in U.S. Strategy

Coca-Cola Co.'s deal Thursday to acquire the bulk of its largest bottler is likely to spell major
changes in the way beverages reach stores and consumers in the U.S.

Coke shares slipped 4% to $53.12 in 4 p.m. composite trading on the New York Stock Exchange
following the company's announcement that it will acquire Coca-Cola Enterprises Inc.'s North
American operations, representing about 75% of the volume of Coke products sold in the U.S.
and all of its Canadian volume. At the same time, CCE will expand its European operations,
acquiring Coke's bottling units in Norway and Sweden, and later possibly its 83% stake in its
large German bottling operations.

The deal, valued at approximately $12 billion, won't be accretive to Coke earnings until 2012.
Once it's completed, Coke's company-owned bottling operations would make up about 50% of
total company revenue, depending on which bottling assets are swapped, JP Morgan analyst
John Faucher pointed out in a research note. "While we have argued that Coke would have to
do this at some point, we think the short-term stock implications for Coke are negative," he
wrote.

CCE shares leaped 33% to $25.48.

The deal, expected to close in the fourth quarter of this year, marks a major change in a strategy
the company has pursued in the U.S. since 1986, when CCE was formed as a large, publicly
traded company separate from Atlanta-based Coke. It also comes as PepsiCo is expected to
close acquisitions of its two largest independent bottlers, putting pressure on Coke to make a
similar move to gain the same competitive advantages PepsiCo stands to reap.

Coke Chairman and CEO Muhtar Kent insisted in a conference call with analysts and investors
that the move doesn't mark an about-face on Coke's part, despite his statements in recent
months to investors that Coke stands by the model of selling its drinks through independent
bottlers regardless of PepsiCo's move. Instead, he called the proposed acquisition "a natural
evolution" needed to address changing consumer tastes, as more people reach for nonsoda
drinks that aren't readily manufactured by bottlers or sold on the mass scale bottlers' distribution
systems are geared to handle. "Fundamental industry forces have altered the consumer,
customer and competitive landscape," he said. "Our franchise system cannot remain static. We
have to create the next generation of high-return opportunities."

Coke remains committed to channeling the bulk of its global sales through an independent
bottling system, Mr. Kent stressed. Coke currently sells about 80% of its global volume through
franchise bottlers, he said. Once the deal closes in the fourth quarter of this year, about 72% of
volume will be sold through those bottlers, he said. "It's still a very major part of our total
volume." Coke said it expects to reap $350 million in synergies from the deal over four years.

Mr. Faucher and other analysts predicted Coke and Pepsi's deals will strengthen the beverage
industry in North America by streamlining costs and spurring innovation and more flexible
distribution of new drinks, potentially spelling lower prices and more choice for consumers. Coke
and Pepsi can decide whether to distribute a product through the bottling system, which delivers
products directly to stores and gives the company greater control over how its products are
displayed, or through warehouses—cheaper and preferable for products too small or not
profitable enough to distribute directly. PepsiCo's $7.8 deal to acquire Pepsi Bottling Group Inc.
and PepsiAmericas Inc. is expected to close Friday.

Owning their bottlers also gives Coke and Pepsi greater flexibility with retailers because they
can negotiate deals alone, "not three or four different people calling on the same account," Mr.
Kent said in an interview.

"Coke couldn't sit back while Pepsi delivered $600-plus million in synergies for reinvestment and
then transformed its U.S. business model," Bill Pecoriello, chief executive of ConsumerEdge
Research LLC wrote in a research note Thursday.

Among the moves the companies might make, Mr. Pecoriello said, would be to start distributing
cases of bottled water to supermarkets and other large retailers through warehouses rather than
the more expensive direct-to-store system operated by the bottlers. That will help keep costs
down amid stiff competition from private-label brands, he said.

It remains unclear whether Coke will hold onto the North American bottling operations over the
long term. The company plans to put them into a subsidiary, along with its own food-service and
other operations. Some speculated that the company would sell them to another big bottler,
perhaps Coca-Cola Femsa, or carve them up among smaller independent bottlers in the U.S.
Mr. Kent declined to outline an end game, saying only that "what we see in the landscape of the
U.S. is a meaningful role for partnerships."

The cost of the deal could rise as Coke will probably have to negotiate with Dr Pepper Snapple
Group Inc. for the rights to distribute its beverages now sold by CCE. PepsiCo agreed to pay
 $900 million for the rights to sell Dr Pepper Snapple beverages currently distributed by its two
big bottlers. Mr. Kent declined to comment on Coke's plans.

 DEALS & DEAL MAKERS

 FEBRUARY 25, 2010

www.wallstreetjournal.com accessed 25/10/10