The Coca-Cola Company; market cap (as of 28/11/2014): $194.0bn

SABMiller plc; market cap (as of 27/11/2014) £57.17bn

Introduction

SABMiller, the world’s second biggest brewer by revenue has agreed to a merge with one of Coca-Cola’s bottler, Coca-Cola Sabco, to combine bottling operations in Southern and east Africa and form a new company, Coca-Cola Beverages Africa, which, based in Port Elizabeth (South Africa), will become the biggest bottler of the soft drink in Africa and the 10th largest in the world, with annual revenue of $2.9bn and 14,000 employees in more than 30 plants.

About Coca-Cola

The Coca-Cola Company is the world’s largest beverage company delivering its products in over 200 different countries worldwide employing more than 130,000 people. Founded in 1892 and based in Atlanta, the Company owns or licenses and markets more than 500 non-alcoholic brands, for a total value of $64.7bn (Eurobrand). Despite $46.25bn revenues and a worldwide 4% five years CAGR, Coca-Cola is in the middle of a cost-cutting operation aimed at countering falling soda sales in many of its key markets, especially North America. In order to diversify its revenues base the Company is seeking a bottling partner to strengthen its position in another key market, namely Africa. Going in this direction, the merge of the firm’s subsidiary Coca-Cola Sabco, owned for 80% by Gutsche Family, with the world’s second biggest brewer, SABMiller, will create a new business, Coca-Cola Beverages Africa. Coca-Cola Beverages Africa can leverage the scale, resources, capability and efficiency needed to accelerate Coca-Cola growth and contribute to the economic and social prosperity of African communities” – said Muhtar Kent, Chairman and CEO of The Coca-Cola Company.

About SABMiller

SABMiller is a South African multinational brewing and beverage company with headquarters in London, United Kingdom. It operates in 80 countries around the world and among its brands includes Fosters, Grolsch, Miller Brewing Company, Peroni, NastroAzzurro and Pilsner Urquell. SABMiller is already one of the major bottlers of Coca-Cola, with established businesses in various African countries: Botswana, Comoros, Ethiopia, Kenya, Mayotte, Swaziland, Uganda and Zambia. The collaboration will allow SABMiller to strengthen its presence in Africa. Despite being one of the most promising long-term markets due to its favorable demographics and fast growing economies, the African market has a stagnant beer demand, while soft drinks request is still increasing. If we consider that soft drinks’ plants requires less capital investments than those of beer, while having a profit margin of 19% it is easy to understand why SABMiller is more than willing to undertake this project.

Behind the Deal

The deal represents a move towards greater convergence between brewers and soft drinks companies since the hopes for mega-mergers in the brewing industry are slowly disappearing, as testified by SABMiller’s failure to take over Heineken in September. The main reason of the merge seems other than creating synergies, since beer and soft drinks activities will be run separately. “We are not going to be looking for strong synergies, particularly in sales and distribution. And probably even manufacturing.” said Mr. Clark, SABMiller chief executive. The deal is a strategic choice. Both the companies want to consolidate their businesses in Africa. In addition, Coca-Cola prefers minority stakes in bottling and distribution assets, focusing on selling soda concentrate, which has higher profit margins and requires lower capital expenditures. On the other hand, SABMiller is trying to have more exposure on the soft drinks sector, which represent 21% of its business and will rise to 26% after the merger, because of its high-expected growth.

The deal is going to be comprised in two phases. Coca-Cola Beverages Africa will initially produce and distribute Coca-Cola beverages in nine countries including South Africa, Kenya and Namibia. Later on, SABMiller intends to include its Swaziland soft drinks business and those of its listed subsidiaries in Botswana and Zambia, though this step will depend on the approval from shareholders and regulators. As a part of the transaction, there will be a side deal for Coca-Cola. The company will buy SABMiller’s “Appetiser” soft drinks brand. It will also acquire other 19 non-alcoholic drinks owned by SABMiller in Africa and Latin America, for around $260m in cash while the rest of the deal is entirely equity.

Coca-Cola Beverages Africa will be 57% owned by SABMiller, 31.7% owned by Gutsche Family Investments, the majority shareholder in Coca-Cola Sabco, and 11.3 percent by Coca-Cola.

SABMiller was advised by Rothschild, while Coca-Cola was advised by Nomura and NLA.

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