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Coca-Cola bottling deal targets irksome tax hiccup

LONDON (Reuters Breakingviews) – What could be more American than Coca-Cola? A 35 percent corporation tax rate, for starters. That might no longer be a problem for one of the U.S. drinks giant’s biggest bottling groups, if a planned three-way merger, which mixes cost savings with tax-efficient goodness, comes to pass.

Coca-Cola Enterprises, which pours, packs and sells the fizzy drink across many European countries, is listed in New York, but its business is all too European. Sales for the continent have been sliding, and reporting euro sales in U.S. dollars adds to the misery. Revenue slid 17.5 percent in the second quarter of 2015, though only 2 percent after currency wrinkles are ironed out.

Merging with two unlisted German and Spanish Coke bottlers is a kind of solution. First, it should create pretty sizable savings, in the region of $375 million of pre-tax synergies a year. Assuming those recur but don’t grow, they would have a present value of around $2.8 billion after being taxed and capitalized. The listed-company shareholders get 48 percent of those in line with their ownership in the new group, and a cash payout of $3.3 billion.

There is other mixology at work. The new entity will be domiciled in the United Kingdom, albeit with listings in Amsterdam, Madrid and New York. That will reduce the need to pay U.S. tax on its foreign earnings. The hit isn’t huge – Coca-Cola Enterprises paid $75 million to the U.S. authorities in 2014. But apply to that Coca-Cola Enterprises’ forward-year price to earnings multiple of 19, and it’s equivalent to $1.4 billion to the group’s shareholders, compared to an undisturbed market capitalization of $10.4 billion.

Deals motivated by a desire to cut tax have set teeth on edge in the United States before. Think of the aborted takeover of UK pharmaceuticals group Shire by U.S. rival AbbVie. In this case, there’s less of an objection, since Coca-Cola Enterprises doesn’t actually do anything outside of Europe, and since the U.S. entity will still technically exist, it’s not a clean break. But it undeniably makes an appealing deal a little bit sweeter.


– Three of Coca-Cola’s European bottling companies announced a merger on Aug. 8, pooling their operations in a new, tax-efficient structure.

– Coca-Cola Enterprises, which bottles and sells drinks in western European countries, will own 48 percent of the new company, which will be called Coca-Cola European Partners. The combination aims to create pre-tax synergies of between $350 million and $375 million within three years.

– The other two members of the trio are Coca-Cola Iberian Partners, privately held and majority owned by Spain’s Daurella family, and German bottler Coca-Cola Erfrischungsgetraenke, which is currently part of the Coca-Cola Co.

– Coca-Cola Enterprises would get shares in the new company as well as a cash payout of $14.50 per share, or $3.3 billion in aggregate, funded by the enlarged group taking on new debt. Coca-Cola European Partners would have a tax rate of 26 to 28 percent and be domiciled in London.

– Coca-Cola Enterprises reported a 17.5 percent slide in revenue for the second quarter of 2015, driven by unfavourable currency movements and a 1 percent decline in volumes. The company is the sole bottler for Coke in the countries where it operates.

– Shares in Coca-Cola Enterprises rose 2.8 percent by noon Eastern on Aug. 6, at $53.30, giving the company a market capitalization of $12.2 billion.

– Coca-Cola Enterprises statement:

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