NEW YORK ( TheStreet) -- As if to reaffirm the wisdom of rival PepsiCo's ( PEP) recent deals with bottlers Pepsi Bottling Group and PepsiAmericas, Coca-Cola ( KO) decided to pursue a grand acquisition of its own. But how does its acquisition measure up to Pepsi's? On Feb. 25, Coke announced that it isis buying Coca-Cola Enterprise's ( CCE) North American bottling business for more than $12 billion. Meanwhile, CCE has agreed in principle to buy Coke's bottling operations in Norway and Sweden and to obtain the right to buy its German bottler. Complicated? A bit. And more to the point, it's not entirely clear that this deal would benefit Coke in the way some investors would have hoped. "Coke is considered an emerging market and international growth stock -- but this deal takes overseas revenues from 74% of total to 54%," Barclays Capital analyst Michael Branca told Reuters. The report also notes that the deal would result in half of Coke's revenue being derived from bottling drinks, which has smaller profit margins than its current beverage syrup business. Still, in a note to investors, J.P. Morgan analyst John Faucher generally writes favorably about the transaction -- albeit with a caveat. "The deal should help fix Coke's North American business in the long term, but it slows its growth profile with higher exposure to North America," Faucher writes. Much like Pepsi, Coke's reasoning for greater control over the bottling business has to do with the desire for greater flexibility with its distribution network and product mix, Faucher explains. Coke says it expects the transactions to generate about $350 million in synergies over four years, compared with Pepsi's projected pre-tax annualized synergies of about $400 million by 2012.
The deal will bring North American beverages to almost 50% of Coke's revenues, while Pepsi's would bring its North American beverages to about 40% of its revenues. All of which poses an interesting question for investors who were drawn to Coke and Pepsi mainly for their international presence. It's also worth noting that "while Coke describes the deal as 'cashless,' and this is technically true, both debt and stock, which Coke is using for the deal, bear some similarity to cash," Faucher points out. As part of the deal, Coke has agreed to assume $8.88 billion of CCE debt and its accumulated benefit obligation of $580 million. "CCE becomes a faster grower with better margins and lower debt leverage," going from 30% sales in Europe to 100%, Faucher writes. The company will keep the U.S. as its home base. Pepsi meanwhile, announced the completion of mergers with its two largest bottlers on Feb. 26. Back in August, Pepsi said the total value of the shares it would be acquiring amounted to $7.8 billion. "Make no mistake about it, PepsiCo purchased its bottlers because it believes in the upside of integrating the value chain of all of its beverage brands into a single portfolio in North America, to be managed by PepsiCo," Credit Suisse analyst Carlos Laboy wrote in a note to investors. "We are not sure that is the case for all of its competitors. Owning bottlers requires a culture of chasing pennies, embracing the unglamorous and tedious execution discipline of bottling and becoming an effective beverage innovator of company-owned businesses. Is this in the DNA of PepsiCo's competitors?" Pepsi is still Laboy's top beverage pick.
Meanwhile, embedded fortuitously in the soda wars is Dr Pepper Snapple, ( DPS), which Pepsi announced would be the recipient of $900 million, payable upon closing of its acquisitions. This was done so that Pepsi would be entitled to manufacture and distribute Dr Pepper and certain other DPS products in the territories where they are currently distributed by the acquired bottlers. Incidentally, Coca-Cola Enterprises also happens to be a large distributor of Dr Pepper Snapple products, which has lead to speculation that DPS will soon be receiving another big windfall. In light of all this, we ask TheStreet readers: As the soda wars reach their resolution, which company will ultimately emerge as the biggest winner from these acquisitions?
-- Reported by Andrea Tse in New York
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