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Coca-Cola West, East Japan to Merge in a $2.7B Stock Deal

The Coca-Cola Company’s KO Japanese arm, Coca-Cola Japan recently backed the much- awaited merger between Coca-Cola’s largest independent bottlers in Japan – Coca-Cola West Co., Ltd. and Coca-Cola East Japan Co., Ltd.

The Deal

In a stock swap deal valued at about 270 billion yen ($2.7 billion), the leading Japanese bottlers have agreed to integrate their businesses to form a new Coca-Cola bottling company, Coca-Cola Bottlers Japan Inc. (“CCBJI”).

Under the deal, Coca-Cola West will acquire Coca-Cola East Japan and the latter’s common shareholders will receive 0.75 Coca-Cola West common shares. Meanwhile, Coca-Cola West shareholders will own 53.3% of CCBJI while Coca-Cola East Japan shareholders will hold 46.7%. However, the proposed integration is yet to receive approval by the shareholders of both companies.

Background & Financial Synergies

In Apr 2016, the companies had agreed to integrate their businesses to form a bottler that would account for about 86% of Coca-Cola products sold in Japan. As per a report by researcher Inryosoken, the Coca-Cola brand controlled about 27% of the country’s soft-drinks market last year.

CCBJI, which is expected to be established on Apr 1, 2017, is expected to boost Coca-Cola’s competitive position in the Japanese beverage market by responding more quickly to the ever changing consumer preferences in the market.

Coca-Cola West has a market cap of about 313 billion yen (as of Sep 30) and currently serves 22 prefectures across the regions of Kinki, Chugoku, Shikoku and Kyushu, which jointly have a population of approximately 45 million. Coca-Cola West’s sales volumes represent approximately 35% of the total Coca-Cola branded products sold in Japan.

On the other hand, Coca-Cola East Japan has a market cap of 279 billion yen, as of Sep 30, 2016, and represents 51% of total Coca-Cola branded products sold in Japan. It caters to the South Tohoku, Kanto and Tokai regions, including Tokyo and 15 prefectures. This equals to a population of approximately 66 million.

Hence, with this integration, CCBJI will likely have greater synergies by leveraging the strength of the two entities’ commercial operations and will experience higher cost competitiveness in supply chain.

These synergies are expected to result in annual run-rate pre-tax savings of approximately 20 billion yen within three years of closing.

Coca-Cola has been divesting and merging several bottling operations across many international markets since 2014 to revamp its bottling system and thus, improve margins and drive growth.

Three of its European bottlers — Coca-Cola Enterprises, Coca-Cola Iberian Partners and Coca-Cola Erfrischungsgetränke AG (German bottler) — merged to form a new Western European bottler named Coca-Cola European Partners, Inc. CCE this May.

The company can successfully work through the comprehensive refranchising and near-term macro challenges, courtesy of its growth strategies.

Zacks Rank & Key Picks

Currently, Coca-Cola has a Zacks Rank #4 (Sell). Better-ranked beverage stocks include Primo Water Corporation PRMW and Pepsico, Inc. PEP.

Primo Water is expected to witness a 140% rise in 2016 earnings. The company sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

PepsiCo carries a Zanks Rank #2 (Buy). Full-year 2016 earnings growth is projected at 5.1% for the company.

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