Nomura Coke Bottling

The Coke bottling network
EQUITY: EUROPEAN BEVERAGES
De-Coking the system
Global Markets Research
Identifying potential moving parts
28 November 2014
Sector View
Remains
The Rolls Royce distribution system

Most of our analysis of KO to date has focused on the potential for a self-help
story that could create substantial shareholder value (Reassessing the selfhelp story, dated 29 October). However, we think it is only right now to focus
on the Coke global bottling network, which we view as having the best reach of
any distribution system in global fast-moving consumer goods (FMCG). This is
a strong asset for KO, and recent commentary from the company has
suggested that this is an area of focus that could reinvigorate top-line growth
for KO.
Potential for de-Coking the system
In this note we have assessed the opportunity for de-Coking the system to
deliver better growth. In particular, we believe that this could include some
rationalisation within Europe and further consolidation in Africa, following the
proposed merger of businesses in Africa announced on 27 November to form
Coca-Cola Beverages Africa, as well as the divestment of company-owned
bottling assets. Overall we retain some caution on bottlers as we still see some
risks of the brand owner taking a larger share of the profit pie; however, below
we have identified potential moving parts that could change the groups
valuation.
Potential moving parts
KO (Buy TP USD 54) a more aggressive approach to own bottling assets
is part of our self-help story, which supports our USD 54 TP.
CCE (Neutral TP USD 42) potential for additional franchises in Europe and
possible extension of the current concentrate agreement could be positive.
Coca-Cola Icecek (Neutral TP TRY 46) potential to consolidate in Middle-
Bearish
Research analysts
Americas Beverages
Ian Shackleton - NIplc
ian.shackleton@nomura.com
+44 20 7102 1820
Edward Mundy - NIplc
edward.mundy@nomura.com
+44 20 7102 5387
Apurva Parikh, CFA - NSI
apurva.parikh@nomura.com
+1 212 298 4270
European Beverages
Ian Shackleton - NIplc
ian.shackleton@nomura.com
+44 20 7102 1820
Edward Mundy - NIplc
edward.mundy@nomura.com
+44 20 7102 5387
Elsa Hannar - NIplc
elsa.hannar@nomura.com
+44 20 7102 3096
Industry specialist
Mark Howden - NIplc
mark.howden@nomura.com
+44 20 7103 7128
East and India could be positive.
SABMiller (Neutral TP GB 3,450p) potential to be the consolidator for

Coke in Africa and other regions could be positive.
CCH (Reduce TP GB 1,100p) could be at risk of losing some franchises in

W Europe and Africa.
Heineken (Neutral TP EUR 58) less likely to be a Coke consolidator in

Africa now.
LBO scenario
We also assess the attraction for AB InBev to buy out the owned bottling
businesses from KO should an LBO be launched by 3G/Warren Buffett, as set
out in our 29 October review. We would note that ABIs current Pepsi
agreement in LatAm could expire by the end of 2017, with two years notice
required, which would remove any conflict of interest.
See Appendix A-1 for analyst certification, important disclosures and the status of non-US analysts.
Nomura |
28 November 2014
Contents
The Coke bottling network ................................................................... 3
Europe ................................................................................................. 5
Eurasia/Africa....................................................................................... 6
North America ...................................................................................... 7
Latin America ....................................................................................... 8
Pacific .................................................................................................. 9
Potential impact on bottlers ................................................................ 10
Beer companies ................................................................................. 15
Appendix A-1 ......................................................................................... 29
Nomura |
28 November 2014

In our initiation report on the Coca-Cola Company dated 29 April and our follow-up report
dated 29 October (Reassessing The Self-Help Story), we assessed the potential for a
self-help story within KO. In the latter report, we revisited our assumptions here, as well
as analysing the potential for an LBO at KO. In this report we go further in assessing the
potential to reconfigure the global Coke bottling network in order to improve its
performance, which, in turn, should boost system revenue growth and KOs concentrate
sales.
With 3Q results in October, KO announced several actions to reinvigorate growth. This
included leading an unmatched global system of strong local bottling partners. Although
the company has not been specific about areas that might change in the bottling
network, it has always accepted that the system will evolve over time.
In this report we mainly focus on the opportunity to improve the bottling network. We
believe that KO can be substantially influential in this process, partly as it owns
significant equity stakes in key bottlers, which jointly control nearly one-quarter of
volumes, partly as KO, outside the US, has the unilateral decision on concentrate pricing
each year. In addition, we estimate that KO owns c25% of its bottling volumes via the
Bottling Investment Group and CCR in North America; the company is accelerating its
plans for refranchising the US bottling network and is committed to realising capital tied
up in Bottling Investment Group (BIG).
In particular, we think there is scope to rationalise the European network and to
consolidate Africa among fewer bottlers. We believe that this could involve Coca-Cola
Hellenic giving up markets such as Ireland and Nigeria. We would view Coca-Cola
Beverages Africa (the proposed merger of The Coca-Cola Company, SABMiller and
Coca-Cola Sabco as announced 27 November) as the new anchor bottler in the region
with 40% of total Coca-Cola beverages volumes. We also see scope for CCE to add new
territories, including Germany, still owned by KO.
We have assessed the opportunity for expansion for the Coke bottlers that we cover (CC
Hellenic, CC Enterprises and CC Icecek). We have also analysed the opportunity for
major brewers to get more involved as Coke bottlers. Traditionally, KO has not liked its
bottlers to be involved with beer as it was seen to distract from the soft drinks business;
only in markets where there were limited routes to market (eg, Africa, parts of LatAm)
was the beer/soft drinks combination seen as acceptable.
However, we believe that this attitude is changing at KO; in addition, brewers appear to
be becoming more interested in soft drinks. We would note the following:
Growth markets such as Africa require well capitalised bottlers that are willing to invest
for growth, and the large beer companies tick that box.
Many brewers are becoming more focused on soft drinks rather than seeing it as a
subsidiary business to beer, eg, SABMiller, Heineken (in Africa). Part of this may reflect
a desire to close off alternative distribution channels to possible new entrant brewers
see below.
The Pepsi network is being used for new entrants into beer, eg, the deal announced on
10 November for the joint venture between LatAm brewer CCU (partly owned by
Heineken) and the Pepsi bottler in Colombia, Postobon, to enter the Colombian beer
market. Many of the Pepsi bottlers outside the US are beer companies.
Nomura |
28 November 2014
Background
We estimate that the Coke bottling system revenue is USD 117bn. This splits broadly as
illustrated in Fig. 1. We estimate that the system EBIT (USD 19bn) splits c50/50 globally,
but does vary by region (Fig. 2).
Fig. 1: Estimated system revenue by region (USD 2012)
Fig. 2: Estimated system EBIT by region Coke vs bottlers
North
America
19%
Pacific
26%
$7.0
Total concentrate EBIT
Total bottling EBIT
$6.0
56%
$5.0
$4.0
37%
45%
$3.0
Latin
America
25%
Europe
17%
$2.0
43%
63%
44%
56%
$1.0
55%
57%
44%
Eurasia &
Africa
13%
$0.0
N America
Latin America
Eurasia &
Africa
Europe
Pacific
Source: Company data, Nomura research
Below we set out the global split of the bottler network:

Fig. 3: Estimated system revenue by key bottlers (USD 2012)
Andina CC Sabco COFCO
1%
1%
CC Icecek 2%
2%
CC Swire
2%
CC Iberian
3%
KO 23%
(CCR 16% & BIG 7%)
SAB
3%
Arca
3%
CC West
4%
CC Amatil
4%
CC East
6%
Others
16%
CC Enterprises
7%
CC Hellenic
7%
FEMSA
10%
Note: the chart is pre the SAB-SABCO deal announced on 27 November

In Appendix 1 we set out how the concentrate/bottler model works.
Nomura |
28 November 2014
Europe
We estimate Europe accounts for 14% of system volumes and 17% of system revenues.
We see pressure from increased retailer power, across the EU, for a more cohesive
bottler network. Looking at the bottling map of Europe, we see Germany (currently
owned by KO) and Ireland (currently owned by CC Hellenic) as the territories that fit least
well with the current owners. We also see questions about the long-term ownership of
Denmark and Finland (currently owned by Carlsberg, which is the Pepsi bottler in
Sweden and Norway).
In terms of new owners, CCE has indicated interest in expanding its W Europe footprint.
During an investor conference in September 2014 the CCE CEO mentioned that
acquisition targets include Germany (owned by KO), Spain/Portugal (owned by CocaCola Iberian Partners, a private bottler), Denmark/Finland (owned by Carlsberg) and four
markets owned by Coca-Cola Hellenic (we assume Ireland, Austria, Switzerland and
Italy). We also see the private company Coca-Cola Iberian Partners, which has
successfully consolidated the bottling system in Spain and Portugal, as a possible
consolidator in the region.
Fig. 4: Europe segment map and pie chart with main bottler estimated share of revenues (USD, m)
Nomura |
28 November 2014
Eurasia/Africa
We estimate that Eurasia/Africa accounts for 18% of system volumes and 13% of system
revenues. Within this, we estimate that Africa is c51% of divisional volumes and 66% of
divisional revenue.
Within Eurasia, most markets are owned by either CC Hellenic or CC Icecek and we do
not expect major moves here. KO owns most of the India bottling within BIG, which we
would expect it to sell in the medium term. Given CC Iceceks expertise of operation in
the region, and the 49% acquisition of Coca-Cola Pakistan in 2008, we believe this could
provide an interesting opportunity.
Africa still appears highly fragmented and, as a key growth region, it needs well
capitalised bottlers to fund investment. Pre the deal announced on 27 November
SABMiller was the largest bottler in Africa with c28% share, followed by private company
Coca-Cola Sabco with 16%. We believe that other key markets, which SABMiller could
look to take on, include Nigeria (from CC Hellenic). Heineken has expressed interest in
being a larger KO bottler in the region but it starts with a relatively small share of the
region. We believe that it is more likely that CC Icecek will take on additional markets in
the Middle East Africa, eg, Egypt, which is a joint venture between KO and a local
partner.
Fig. 5: Eurasia & Africa segment map and pie chart with main bottler estimated share of revenues (USD, m)
Note: India shifted from Eurasia to Asia Pacific beginning 2013. SABMiller includes Castel contribution.
Source: Company data, Nomura estimates
Nomura |
28 November 2014
North America
We estimate that N America accounts for 21% of system volumes and 19% of system
revenues. After the CCE acquisition in October 2010, we estimate that c85% of N
America is now owned by KO.
KO started the US refranchising process in April 2013 when it announced that five
bottlers had acquired additional territories in the US. Later, in February 2014, the
company signed a letter of intent to refranchise territories to two new bottling partners.
The first definitive agreement was signed in May 2014 when Coca-Cola Bottling
Consolidated agreed to buy the distribution assets in Morristown and Johnson City, TN
for USD 13.5m. This suggests total refranchising proceeds of USD 1bn-3bn compared
with the USD 10bn paid for CCE in 2010.
With the 3Q results, the company indicated some acceleration in the refranchising
programme, with a plan to refranchise at least two-thirds by 2017. We believe that the
new refranchising agreements change the historical brand owner/bottler relationship
because the new franchisees are mainly distributors, with the production assets retained
by KO. The company continues to trial seven new models, and is committed to providing
an update by year-end (we note that the head of the company-owned US bottling
business CCR, Paul Mulligan, is due to address the Beverage Digest conference in New
York on 8 December). It does however appear that the company is committed to
extracting synergies from production rationalisation, which suggests that the base
refranchising model is mainly focused on logistics.
Fig. 6: North America segment map and pie chart with main bottler estimated share of revenues (USD, m)
Note: Canada is entirely covered by CCR

Nomura |
28 November 2014
Latin America
We estimate that Latin America accounts for 29% of system volumes and 25% of system
revenues.
We estimate that the largest bottler in LatAm (Coca-Cola Femsa) accounts for c38% of
system revenues, with Arca Continental c14% and Embotelladora Andina with c8%.
SABMiller is the bottler in Honduras and El Salvador.
Although the region is still relatively fragmented, we see less urgency for reconfiguring
the bottling network here than in other regions as KO has dedicated bottlers that appear
to be delivering growth. It could make sense for SABMiller to widen its operations in this
region, especially where it has a major presence in beer, ie, in Peru and Colombia;
however, Colombia is owned by Coca-Cola Femsa, and Peru is owned by a familycontrolled quoted company Corporacion Lindley.
Fig. 7: LatAm segment map and pie chart with main bottler estimated share of revenues (USD, m)
Nomura |
28 November 2014
Pacific
We estimate that Pacific accounts for 18% of system volumes and 26% of system
revenues. Within this we estimate that Japan is c60% of divisional revenues.
The Japanese bottling network has been improved recently by the merger of four bottlers
to produce Coca-Cola East; Coca-Cola East and Coca-Cola West do the majority of the
bottling in Japan.
China is split between three bottlers: KO-owned, Swire Beverages and COFCO CocaCola Beverages. The rest of Asia is fairly fragmented, with KO itself owning Vietnam,
Cambodia and Malaysia; Coca-Cola Femsa now owning the majority of the Philippines;
and Coca-Cola Amatil owning Australia. Last month KO announced that it was taking a
direct 29% stake in Indonesia, with the remainder still owned by Coca-Cola Amatil.
We see KO as a ready seller of the owned bottling businesses in the region, but without
a truly Asian anchor bottler, it is difficult to see the obvious buyer. Medium term, we
believe that there could be scope for more efficiencies within Australia if the bottling
business was to be merged with a brewer (eg, SABMiller).
Fig. 8: Pacific segment map and pie chart with main bottler estimated share of revenues (USD, m)
Note: India shifted from Eurasia & Africa to Pacific beginning 2013; Coca-Cola FEMSA bought 51% of Philippines ops Jan 2013
Nomura |
28 November 2014
Potential impact on bottlers

Coca-Cola Enterprises (Neutral TP USD 42)
We see considerable potential for the company to gain a larger footprint in W Europe,
with a key focus on buying Germany from KO. In addition, we see other possible deals to
include Ireland (from Coca-Cola Hellenic) and Denmark/Finland (from Carlsberg). The
recent extension of the CEOs contract through to the end of 2016 supports our view that
the company is close to gaining new franchises, which could also give the company a
renewal of its current concentrate agreement. We now attach a 50% probability for a
deal on Germany before 2016, which adds USD 4 to our base DCF valuation of USD 38,
giving our target price of USD 42.
Germany
When CCE sold its US bottling business back to KO in 2010, the company received an
option to purchase the Germany territory by May 2013; however, this lapsed in 2013 as
we believe that buyer and seller could not agree a price. Since then, KO has continued
to say that it is looking to sell the German business. We can also see the attraction for
CCE to buy this as it could open the way for an extension of the existing 5-year
concentrate pricing agreement beyond 2015.
We estimate Germany currently generates USD 2.4bn in revenue, USD 30m in EBIT
(1% margin) and USD 230m in EBITDA (10% margin). In 1985 Coke had 96 separate
bottlers in Germany as a result of handing out small franchises to rebuild a presence
after the Second World War; KO has successfully consolidated this into one bottler unit,
owned by the companys BIG division, but we believe that there has been little
consolidation of bottling plants and distribution structures. Germany is a tough market
given presence of hard discounters, low profitability and a unionised labour force.
Fig. 9: Proforma EPS dilution based on historical German profits
All numbers USD, m unless
Germany financials and valuation
Potential financing
2014E
Revenue
EBIT
EBIT margin%
Depreciation
% of sales
EBITDA
% margin
Revenue multiple
Acquisition value
2,400
30
1%
200
8%
230
10%
1.2x
2,880
Impact on EPS
2014E
CCE EBITDA
Net debt
Net debt to EBITDA
1,393
3,701
2.7x
Incremental EBITDA
Total consideration
- Debt funded
- Equity funded
230
2,880
2,880
0
Pro-forma EBITDA
Pro-forma net debt
Net debt to EBITDA
1,623
6,581
4.1x
2014E
Est net income
additional acquired EBIT
impact of additional debt (4.5% rate)
additional PBT
impact of additional tax
Additional post tax income
Adjusted net income
diluted shares m
est EPS per model
est EPS incl Germany
accretion/dilution
722
30
-130
-100
30
-70
652
256.4
2.82
2.54
-9.7%
Under a more normalised operating scenario, we estimate the German operations could
generate an 8% EBIT margin (compared with CCE average 13%), which includes some
synergies from a merger with CCE. We estimate that this would be EPS accretive for
CCE (+6%). It is possible that an acquisition of Germany could be phased, say with an
initial 50% stake and an option to buy out the remaining 50% at a later date; this would
reduce any initial dilution from the deal.
Ireland
We believe that there would be considerable synergies in combining Ireland with GB.
Competitor Britvic, which has the Pepsi franchise in Ireland and GB, has just
consolidated back office across the markets; in addition, there is a material overlap in the
customer base between the geographies.
We estimate that Ireland has cUSD 335m of revenue and cUSD 20m of EBIT (6%
margin) and cUSD 30m of EBITDA. With synergies of merging this with GB, we believe
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Nomura |
28 November 2014
that CCE could see incremental profit of say USD 10m, giving a margin of c12%. We
would value Ireland at cUSD 400m (10x est EBITDA).
In addition, the acquisition of Ireland could open the door for tax savings. We have
previously written that, for CCE with all its operating profit in Europe, we believe that
there may be a possibility to realise value via a tax inversion, ie, moving the tax domicile
from the US to Europe. CCEs guidance for 2014s effective tax rate is 26-28% (and we
assume 28%) compared with European-based soft drinks companies CC Hellenic and
Britvic where the effective tax rate is c25%. We estimate that a three percentage point
decrease in the effective tax rate would create an additional USD 2 in value. If the
company were able to access the lower Irish tax rate (currently 11%), this could
materially increase the potential for value creation.
Denmark/Finland
Carlsberg has the bottling franchise for both Denmark and Finland. We believe that
these are closely integrated with the beer businesses and detaching the distribution and
selling would not be easy. However, Carlsberg is also the Pepsi-bottler in Sweden and
Norway, which ultimately presents a conflict of interest; as the company rolls out more
pan-European IT systems (BSP1 programme underway); we believe that these conflicts
could become more of an issue.
We estimate that Denmark has USD 300m of revenue and USD 40m of EBITDA (13%
margin), with Finland having USD 150m of revenue and USD 15m of EBITDA (10%
margin). Both markets could be a good fit for CCE, which has the Coke bottling franchise
in the other Scandinavian markets, Norway and Sweden. We believe that this could give
rise to significant synergies. We would value Denmark and Finland at USD 550m,
assuming a valuation of 10x EBITDA (broadly in line with the 9x EBITDA that CCE paid
for Norway and Sweden in 2010).
In 2010 CCE bought the Norway and Sweden franchise for USD 870m. We estimate that
this was c1x net sales for the combined business and c9x EBITDA (est cUSD 100m, with
est. EBIT of cUSD 65m, giving an EBIT margin of c8%).
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Nomura |
28 November 2014
Coca-Cola Hellenic (Reduce TP 1,100p)

Given the subdued performance in recent years and following the concentrate price
rebasing earlier this year, we see the company as more likely to lose franchises than
gain them. Although the loss of, say, Ireland would not be material, giving up Nigeria
would take away the key growth market. Although we do not see significant risk to F14
earnings, we see some risk to high expectations for recovery in F15 and F16, where
consensus is assuming double-digit EPS growth. Although we acknowledge scope for
margin improvement in F15 (we assume 40bp), given a favourable input cost
environment, we believe that consensus top-line estimates do not fully take into
consideration the ongoing challenging macro, a more moderate price/mix outlook for
2015 and forex volatility.
With its FY13 results, the company announced a EUR 40m upward rebasing of its
concentrate costs (a c3% increase). We would interpret this as a sign of frustration at KO
with the recent performance of CC Hellenic; the concentrate cost paid to KO had been
broadly flat during 2008-12. As a result, we see little potential for the company to gain
new bottling franchises and see some risk of the company losing franchises. With CCE
to the west of most of CCHs geographies and CCI toward the east, we do not expect the
company to participate in transformational deals in the short term.
Nigeria at risk?
The 2013 20F indicates that all the companys bottling agreements run until 2023.
However, we see potential for KO to put pressure on a bottler to cede a contract through
possible increases in concentrate costs.
Approximately 10% of CCH volumes are generated in Nigeria. We would highlight that
the Leventis family (through the Kar-Tess holding company vehicle) has three major
businesses a 23.3% stake in CCH, a 43.7% stake in Frigoglass through Boval S.A. and
an 81.1% stake in the Nigerian conglomerate AG Leventis plc. The Nigerian connection
dates from 1920, when Mr Anastassios Leventis, a Greek Cypriot, came to Nigeria to set
up a trading business.
A sale of Nigeria at a 15x EBITDA multiple (in line with CCI current valuation) implying
total value of cEUR 1.3bn would bring the companys F15E net debt to EBITDA multiple
from 1.4x to a net cash position. We estimate that this would be <2% earnings accretive;
however, the company would lose a key growth engine of the business.
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Nomura |
28 November 2014
Coca-Cola Icecek (Neutral TP TRY 46)

We would regard CCI as one of the most compelling top-line growth stories within global
beverages, given favourable demographics and low per-capita consumption of soft
drinks in the territories in which the company operates. We believe it benefits from strong
market positions, experienced management and close alignment between bottler and
brand owner. Over the medium term, we believe the company can increase group
volumes low double digits (mid-single in Turkey, mid-teens in International) and
revenues ahead of volumes with EBITDA margin expansion. However, with pressures on
margins in Turkey in 2014 and tough current trading conditions, we believe it may take
several quarters for the company to revert towards its historical growth algorithm. From a
consolidation perspective, in the near term we see a focus on capturing the organic
growth opportunity in existing territories, however, over the medium term we believe that
CCI is favourably positioned to take on more franchises in the region.
Pakistan potential buyout of KOs 51% stake
Coca-Cola Beverages Pakistan was established in Karachi in 1996. In 2008, CCI
acquired 49% share in Coca-Cola Pakistan and took over the management. CCI paid
USD 80m for the stake which in 2007 generated sales volumes of 77m cases. In 2013,
Pakistan volumes were 200m cases and we estimate EBITDA TRY 170m (USD 75m).
Applying a 15x multiple (in line with CCI current valuation) to the business would value it
at TRY 2.6bn (USD 1.1bn) and a buyout of KOs 51% stake at TRY 1.3bn (USD 570m).
This would bring CCI net debt to EBITDA close to 3x. CCI has an ambitious capex
pipeline in Pakistan to build three new soft drinks plants (2015-17), therefore in the near
term we see both CCI and KO focused on growing overall system revenues in Pakistan
rather than a change of ownership.
Egypt
Coca-Cola Egypt is a joint venture between KO and the MAC Beverages Group. We
would see some strategic rationale for CCI to own this asset given proximity to existing
territories as well as potential to generate cost synergies (back office and procurement)
and application of CCIs best practices. We estimate volumes of 215m cases and
revenues of USD 644m. We estimate that a 12% EBITDA margin would imply EBITDA of
close to USD 80m and a valuation of USD 1.2bn (TRY 2.7bn) for the business, assuming
an EBITDA multiple of 15x (in line with CCI current valuation). With balance sheet
capacity of approximately USD 650m for deals, we believe that CCI would look to involve
KO in any potential acquisition, possibly with KO retaining its stake in the business (a
similar structure to Pakistan). However, given volatility in Egypt, it is unclear whether CCI
would wish to widen its footprint in this market.
India
The Coca-Cola bottling network in India is a combination of KOs business (in BIG),
Hindustan Coca-Cola Beverages and other bottlers. Hindustan Coca-Cola Beverages
generates volumes of 471m cases and we estimate revenues of USD 1,049m. We
calculate that a 12% EBITDA margin would imply EBITDA of USD 125m, and applying a
15x multiple (in line with CCI current valuation) would imply a valuation of USD 1.9bn for
the business. This is beyond CCIs current balance sheet strength, but we believe this
deal could be revisited over the medium term.
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Nomura |
28 November 2014
The Coca-Cola Company (Buy TP USD 54)

In our 29 October research review, we revisited the self-help story at KO. We estimate
that factoring in all the upside from potential strategies would still give a theoretical value
per share of USD 76; our updated analysis implies a target price of USD 54, which
includes some benefit from efficiencies in the owned bottling businesses. The strategic
initiatives announced by the company with the 3Q results are a step in the right direction,
but we believe that the pace here needs to step up considerably. Without this, given the
considerable scope we think there is to create value within The Coca-Cola Company
(KO), we see some attraction for an LBO, which could more aggressively tackle value
creation.
With its 3Q results, the company indicated an acceleration of momentum in realising
value in bottling assets. In the US the company indicated some acceleration in the
refranchising programme, with a plan to refranchise at least two-thirds by 2017.
It is slightly ironic that the first bottler-related transaction since 3Q (announced on
30 October) led to KO investing more capital in owned bottling, with a USD 500m direct
investment made in Indonesia (majority owned by Coca-Cola Amatil). We believe that
KO has been unhappy for some time with growth in what should be a strong market.
However, we would also see this investment as putting increased pressure on KO to
realise capital in other owned bottling assets.
Within BIG we now see a likely sale of Germany to CCE; however, with most of the
remaining owned bottling businesses in the Pacific region, and without a truly Asian
anchor bottler, it is difficult to see the obvious buyer for these assets.
Under the LBO scenario we analysed in the 29 October research review we assumed
that all of the owned bottling businesses would be sold for cUSD 26bn (USD 10bn for US
and USD 16bn for BIG).
Fig. 10: Estimated bottling investments valuation (2013)
Revenue (USD
bn)
Vol (muc)
Germany
2.4
659
3.6
30
India
1.2
540
2.2
60
China
2.6
1,008
2.6
129
5%
Vietnam
0.2
68
2.4
-2
-1%
0.5
3x rev
Cambodia
0.0
12
2.4
-1%
0.1
3x rev
Malaysia
0.4
96
4.0
20
5%
0.8
2x rev
Singapore
0.1
22
6.0
7%
0.3
2x rev
$7bn
2,404
2.9
246
3.6%
$16bn
2.4x rev
Country
Total
Rev/Case
(USD)
EBIT (USDm)
Est valuation
($bn)
Valuation
methodology
1%
3.0
1.2x rev
5%
3.7
3x rev
8.0
3x rev
EBIT margin
Muc = Million unit cases

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Nomura |
28 November 2014
Beer companies
Increased interest in soft drinks?
In our 29 October report on KO we revisited our modelling for global soft drinks. We
believe that global soft drinks can still increase volumes by 4% pa in the medium term,
which is materially better than our modelling for global beer (+2%).
As a result, we are not surprised to see some brewers becoming more focused on soft
drinks. SABMiller has been indicating most of this year that this is an area of focus and
we are not surprised that the company has widened its exposure to African soft drinks
following the creation of Coca-Cola Beverages Africa, as announced yesterday.
Our analysis in emerging markets shows that, in the past two decades, beer volume has
grown at a slower pace than GDP (88% of world GDP), while soft drinks volume has
grown faster than GDP (133% of GDP).
Fig. 11: Global beer volume growth vs GDP growth
Fig. 12: Global soft drinks volume growth vs GDP growth
7.0%
8.0%
6.0%
7.0%
5.0%
6.0%
5.0%
4.0%
4.0%
3.0%
3.0%
2.0%
2.0%
1.0%
1.0%
0.0%
0.0%
-1.0%
-1.0%
Global beer volume growth
Global GDP growth
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
World GDP %yoy
World soft drinks %yoy
Source: Company data, Euromonitor, Plato Logic, IMF, Nomura research
Source: IMF, Euromonitor, Nomura research
Fig. 13: Emerging market beer volume vs GDP growth
Fig. 14: Emerging market soft drinks volume vs GDP growth
12.0%
12.0%
10.0%
10.0%
8.0%
8.0%
6.0%
6.0%
4.0%
4.0%
2.0%
2.0%
0.0%
0.0%
-2.0%
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Emerging beer volume growth
Emerging market GDP growth
Source: Company data, Euromonitor, Plato Logic, Nomura estimates
Emerging Markets GDP %yoy
Emerging Markets Soft Drinks %yoy
Source: UN National Accounts Statistics, Euromonitor, Nomura research
We believe some of the reasons for the slower growth of beer include:
Religion
Some of the fastest growing countries in the world, such as Indonesia and Pakistan,
consume very low rates of alcohol for religious reasons.
Regulation
Beer has been heavily regulated, which depresses its growth rate. Recent examples of
excise tax increases include Zambia and Peru.
15
Nomura |
28 November 2014
Demographics
The beer-drinking population (usually 18 years old plus) is smaller than the soft-drink
drinking population (younger demographic), and is growing at a slower pace.
Using Nomuras GDP growth forecasts and applying world GDP vs volume growth
correlations noted above, we expect global soft drinks growth of 4% annually, higher
than beer volume growth of 2%. Our soft drinks forecast of 4% assumes 6% volume
growth in emerging markets and flattish growth in developed markets. We believe that a
more proactive attitude towards health issues, as well as an increased focus on
innovation, should support this soft drinks growth dynamic in future.
In the table below we set out the historical involvement of the main international brewers
in soft drinks. We have excluded Molson Coors as this company has virtually no
involvement in soft drinks.
Fig. 15: Major global beer companies involvement in soft drinks
Region
Brands
Total
Brazil
Argentina
AB InBev
Asahi
Bolivia
Peru
Uruguay
Dominican Republic
Australia
Indonesia
Malaysia
Guarana Antarctica, Pepsi

7UP, Pepsi, H2OH!
Carlsberg
Heineken
Kirin
Pepsi
Via subsidiary Schw eppes Australia

Pepsi-Cola Indobeverages
Permanis Sdn
Pepsi/ ow n brands
Pepsi
Pepsi
Pepsi
pepsi
Pepsi
Pepsi
Pepsi
Pepsi
KO
Pepsi
Pepsi
KO
KO
Pepsi, ow n brands
Total
Europe - Netherlands
Central Africa - Congo, DRC,
Rw anda, Burundi
Soft drinks c.2% group volum es

Pepsi, ow n brands
Soft drinks operations c.0.3mhl
KO brands
Coke / Pepsi
Pepsi/ KO
KO
Pepsi
Pepsi
KO
KO
Laos
Lao Brew ery Co Ltd, JV w ith government
Pepsi
Vrumona, subsidiary since 1968
KO
Pepsi/ ow n brands
Current franchise volumes c.3mhl
KO
Brazil (distribution w ith Femsa)
KO
Distribution JV Coca-Cola FEMSA
KO
CE Europe - Macedonia, Serbia
KO
KO
US (New England & upstate NY)
KO
Distribution JV CCH
Coca-Cola bottling Co Northern New
England (CONNE) 100% ow ned by Kirin
LatAm - El Salvador, Honduras

LatAm - Other
South Africa
Africa - 21 countries
Europe - Turkey, Russia, the CIS,
Central Asia and the Middle East
Japan
Suntory
80% CSD vols third-party distributors
Other bev 14% group volum es

Profit split not disclosed
Soft drinks 20.6% of group vols,

w e est c.12% group EBITA
Total
SABMiller
Ow nership
Subsidiary Am bev (61.9%) Pepsi/ ow n brands

54% CSD vols third-party distributors
Acquired 100% of Bebidas y Aguas
Gaseosas 03/09
Pepsi, ow n brands
7UP, Pepsi, H2OH!
Red Rock, Pepsi, 7UP
Pepsi
Pepsi
Pepsi
Total
Denmark
Sw eden
Norw ay
Finland
Malaw i
Split of profits
Soft Drinks c.19% of Am bev
EBITDA im plies c.5% of total ABI
KO, Ow n
*Ow n brands
KO
KO/ ow n brands
Acquired Bavaria in 2005
KO
KO, Appletiser
c.25% S Africa EBITA Amalgamated Beverages Industries (ABI)
KO
KO, ow n brands
JV Castel, Zimbabw e associate Delta
KO
24.1% stake Anadolu Efes (50.3% CCI)
KO
KO (via CCI)
c.12% LatAm EBITA
c.11% Europe EBITA
Pepsi
Exclusive Pepsi bottler (1997)
Pepsi
Vietnam
Pepsi
JV w ith PepsiCo Asia Pacific (51% share)
Pepsi
US (East Coast region)
Pepsi
Pepsi Bottling Ventures LLC
Pepsi
*Panama Pepsi licence

16
Nomura |
28 November 2014
ABI (Neutral TP EUR 80)

Our scepticism around an ABI bid for SABMiller is unchangedsee our
report Brewing M&A for further details. We see the expansion of SABMillers activities as
a Coke bottler as creating further complications for ABI as a major Pepsi bottler. We see
a steady equity story at ABI in its relatively protected markets of the US, Brazil and
Mexico, driven by a strong commitment to brand building, squeezing of cash and
traditional Ambev qualities of a hard focus on costs. In addition, we could see a role for
the company to buy out KO bottling businesses if there were to be an LBO of KO from
3G and Warren Buffett.
The soft drinks operations are focused on LatAm, and we estimate they represent c5%
of ABI group EBIT. They consist of both own production (main brand Guarana
Antarctica) as well as bottling and distribution agreements with PepsiCo. Subsidiary
Ambev (AB InBev 61.9% interest) is one of the largest Pepsi bottlers. Ambev has a longterm exclusive bottling agreement with PepsiCo in Brazil that will expire on 31 December
2017; the agreement will be automatically extended for 10 years unless either party
terminates it in writing by 31 December 2015. In December 2012 Ambev and Monster
signed a long-term agreement (renewable every five years) for sale and distribution of
Monster Energy Drinks in Brazil; however, this agreement looks unlikely to last given the
fact that in August 2014 KO acquired a 17% stake in Monster beverages and committed
to using the Coke system for Monster internationally. Soft drinks contribute c19% of
Ambev EBITDA, which implies c5% of total AB InBev group EBITDA.
Potential to grow with Pepsi?
We believe that, after the Interbrew/Ambev merger in 2004, the company did investigate
taking on a Pepsi bottling franchise in other markets but no deals were ever concluded.
In theory, we can see synergies if the company were able to acquire the Pepsi bottling
network in the US; however, in most international markets PepsiCo suffers from lack of
critical mass, which would arguably offer limited synergies with ABIs beer business.
Switching focus to KO?
In our KO report dated 29 October we analysed a possible LBO for KO led by the
Brazilians behind ABI (3G) and Warren Buffett. If this were to take place, we would not
rule out a role for ABI as potentially buying some of the wholly owned bottling
businesses. With the KO refranchising model moving closer to the US beer model, we
would see significant synergies from joint distribution it is interesting that one of the
seven refranchising tests in the US is with a beer wholesaler, Reyes. In addition, we
could see some attraction for ABI buying some of the BIG bottling businesses, eg, in
India ABI currently has a small beer market share (est 2%) that in theory could be
increased materially by leveraging the KO bottling network. It is interesting that ABI could
terminate the LatAm Pepsi agreement in 2017 provided it gives notice by the end of
2015.
Soft drinks account for approximately 5% of ABI profits, all in LatAm. Although it is not
straightforward splitting out Pepsi-bottling and own-brand profit streams, we estimate
Pepsi-bottling related EBITDA is under 2% of ABI EBITDA. This would suggest that the
potential value leakage from ABI changing focus from Pepsi to Coke is low. Further,
although we question the longer-term existence of Carlsbergs bottling arrangements
with both Coke (Denmark and Finland) and Pepsi (Sweden and Norway), we would
highlight that it is not unusual that bottlers work with both Coke and Pepsi. Given that
none of the BIG assets that we highlight in Fig. 16 of the report are based in LatAm, we
believe the conflict of interest for ABI to acquired Coke bottling businesses outside
LatAm is limited.
In total, we would value the owned bottling businesses at KO at cUSD 26bn, with
USD 10bn for N America and USD 16bn for BIG. We estimate current EBIT from these
businesses at cUSD 1.3bn, which would mean the deals, if cash funded, would be EPS
accretive from day 1, even before any synergies. In theory, if ABI were to buy all of these
bottling assets, we estimate net debt/EBITDA would rise from c2x to 3x. We think this
level of leverage would still allow ABI to continue to increase dividend payout ratios.
17
Nomura |
28 November 2014
Fig. 16: Estimated bottling investments valuation
Country
Revenue (USD
bn)
Vol (muc)
Rev/Case
(USD)
EBIT (USDm)
EBIT margin
Est valuation
($bn)
Valuation
methodology
Germany
2.4
659
3.6
30
1%
3.0
1.2x rev
India
1.2
540
2.2
60
5%
3.7
3x rev
China
2.6
1,008
2.6
129
5%
8.0
3x rev
Vietnam
0.2
68
2.4
-2
-1%
0.5
3x rev
Cambodia
0.0
12
2.4
-1%
0.1
3x rev
Malaysia
0.4
96
4.0
20
5%
0.8
2x rev
0.1
22
6.0
7%
0.3
2x rev
$7bn
2,404
2.9
246
3.6%
$16bn
2.4x rev
Singapore
Total
Muc = million unit cases
18
Nomura |
28 November 2014
Heineken (Neutral TP EUR 58)

We continue to be sceptical about an ABI bid for SABMiller, which has been widely
expected; however, we do see scope for potential value creation for Heineken if a deal
does happen. With net debt/EBITDA now down at 2.5x, we estimate the company could
finance up to EUR 10bn of acquisitions from debt, while keeping net debt/EBITDA under
3.5x. Alternatively, it could look to buy back the Femsa stake (20% effective interest)
once the lock-up expires in May 2015, which we estimate as enhancing EPS by c7%.
With SABMiller appearing to become the Coke consolidator in Africa, this may make it
difficult for the company to grow in soft drinks here; in addition, it still has some links with
Pepsi (in Holland). Although fundamentals are looking secure, we see EPS growth
moderating from 11% in F14 to high-single digits in F15-16. At these levels, we believe
the shares need an external catalyst to drive significant further momentum.
Involvement in soft drinks is relatively small (c2% of group volumes). The company has
historically had relationships with both Coke and Pepsi, but the involvement with Pepsi
has fallen in recent years, whereas it has increased with Coke. The company is the main
Pepsi bottler in the Netherlands via the wholly owned subsidiary Vrumona. Vrumona
bottles own brands such as Royal Club, Crystal Clear and Climax as well as PepsiCo
and Gatorade brands, and at an investor meeting on 12 November the company
indicated that this was still a core operation. In August 2013 Heineken sold the Hartwall
business in Finland (Pepsi bottler) to Royal Unibrew as it was seen as a less-beer
orientated business.
At the Whats Brewing seminar Africa & Middle East (June 2014), the company gave a
detailed presentation of its Coca-Cola franchise in Central Africa, indicating an
increasing interest in soft drinks in this region. Heineken currently distributes c3mhl in
Congo, DRC, Rwanda and Burundi with the aim to double this (in line with Coca-Cola
2020 vision) by 2020.
In Brazil Heineken has a distribution JV with Coca-Cola FEMSA that handles distribution
for c40% of Heineken beer sales. Remember Heineken bought the beer business
(FEMSA Cerveza) from FEMSA in 2010 in return for a 20% equity stake. It also has
some beer distribution joint ventures with CC Hellenic in central Europe.
Would like more involvement in Africa?
We would take the view that, with the creation of Coca-Cola Beverages Africa (40% of all
Coca-Cola beverage volume in Africa), this will make it more difficult for the company to
become a consolidator in Africa for KO.
19
Nomura |
28 November 2014
Carlsberg (Neutral TP DKK 515)

The company has a total beverages model in Scandinavia, although this is split between
Coke and Pepsi franchises. As the company rolls out more pan-European IT systems
(BSP1 programme underway), we believe that this conflict could become more of an
issue; however, the integrated operating model in these markets could make it difficult to
unravel current arrangements. Meanwhile, with a deteriorating outlook in key market
Russia, we do not see soft drinks opportunities as high on the companys priority list.
Other beverage volumes (mainly soft drinks) account for c14% of group volumes.
Approximately three-quarters of Carlsbergs soft drinks volumes are generated in the
Nordics, with approximately 10% in eastern Europe (where the company brews the
traditional Slavic soft drink Kvas in Russia and Ukraine), and the balance (15%) in Asia.
We believe that company benefits from having a wider multi-beverage portfolio in the
Nordics given the strictly regulated and sparsely populated markets. In Denmark and
Finland the company is the Coke bottler, whereas in Norway and Sweden it is the Pepsi
bottler.
In Laos the soft drinks portfolio includes Tigerhead drinking water, Mirinda, Revive and
Sting as well as Pepsi brands. In Malawi the company is the Coke bottler.
Time to decide your friends?
Carlsberg has the bottling franchise for both Denmark and Finland. We believe that
these are closely integrated with the beer businesses and detaching the distribution and
selling would not be easy. However, Carlsberg is also the Pepsi-bottler in Sweden and
Norway, which ultimately presents a conflict of interest; as the company rolls out more
pan-European IT systems (BSP1 programme underway), we believe that these conflicts
could become more of an issue.
20
Nomura |
28 November 2014
SABMiller (Neutral TP 3,450p)

We remain sceptical around an ABI acquisition of SAB; ABI has historically been a value
investor, buying undermanaged assets cheaply and running them better (see report
on Brewing M&A,19 September). SABMiller does not appear to fit these criteria it is a
well-run asset with a high valuation. The expansion into further Coke bottling agreements
appears to present a further complication to an ABI bid. Weaker-than-expected 1H
results confirm our view that the company is facing slower growth in emerging market
beer, hence the attractions of growing in soft drinks. With some bid premium likely in the
shares, valuation here looks high (cal 2014E P/E 22.8x). Our target price of 3,450p is
based on the midpoint of a fair value 2,700p and the value implied in a WSJ article on 15
September of a bid at 4,200p (based on a total value of USD 122bn).
We believe that SABMiller historically has viewed soft drinks as non-core, as a product to
help fill the trucks as opposed to a core competency. As per an interview with former
CEO Graham Mackay 23 January 2009, I don't personally think that we will go into nonalcoholic beverages across the globe in any major or systematic way; we are brewers.
However, that has changed under new CEO Alan Clark. Soft drinks today comprise 20%
of group volumes (32 countries) with approximately a 30% own-branded soft drinks (eg,
Pony Malta in LatAm) and 70% as a Coke bottler (Central America, Coca-Cola Icecek,
Castel, South Africa). Although we would recognise that beer momentum is currently
being held back by certain factors (eg, regulation in Colombia, Peru, Zambia, Tanzania
or weather in China), soft drinks momentum has been stronger than beer (1H soft drinks
+9% vs beer -1%). Soft drinks benefits from demographic tailwinds in many emerging
markets where alcohol is prohibited for religious reasons, and soft drinks can also
access a wider population (no legal drinking age requirement) than beer.
Although we believe that SABMiller will remain fundamentally a beer company, the
recognition of the attractiveness of soft drinks growth in its own right sends a strong
message of greater alignment with KO.
Coca-Cola Sabco
The company yesterday announced the proposed formation of Coca-Cola Beverages
Africa, the combination of SABMillers, the Coca-Cola Companys and Coca-Cola
Sabcos bottling businesses in southern and east Africa. The new bottler, Coca-Cola
Beverages Africa, would serve 12 high-growth countries accounting for approximately
40% of all Coca-Cola beverage volumes in Africa, with cUSD 2.9bn revenues and 729m
unit cases (41m hl).
On full completion of the proposed merger, shareholdings in Coca-Cola Beverages
Africa would be SABMiller: 57.0%, Gutsche Family Investments: 31.7% and The CocaCola Company: 11.3%. As part of the transaction, The Coca-Cola Company would also
acquire SABMillers Appletiser brands on a worldwide basis, and acquire or be licensed
rights to a further 19 non-alcoholic ready-to-drink brands in Africa and in Latin America,
for an approximate cash consideration of USD 260m.
The transaction is expected to be EPS accretive to SABMiller in financial year three
following completion of Phase I of the initial transaction.
21
Nomura |
28 November 2014
Fig. 17: Combined African footprint
Fig. 18: Pro-forma financial metrics
Volume (muc)
SABMiller contributed
business
369
Coca-Cola Beverages
Africa
729
Volume (mhl)
21
41.4
1,531
2,937
292
505
19.10%
17.20%
PBT (USD, m)
286
474
Gross assets (USD, m)
794
2,262
Revenue (USD, m)
EBITA (USD, m)
Margin (%)
Note: Pro forma financial figures assume completion of Phase II. Financial figures
represent non-IFRS, unaudited management estimates. SABMiller contributed
businesses shown on March 2014 financial year end (except for ABI volume,
revenue and EBITA which is shown on December 2013 year end); The Coca-Cola
Company and GFI contributed businesses shown on December 2013 year end.
Source: SABMiller presentation 27 November 2014
Source: SABMiller presentation 27 November 2014
The table below sets out the companys historical interests in soft drinks globally.
Fig. 19: SABMiller historical interests in soft drinks
Latam
South Africa
Africa
Europe
El Salvador & Honduras
Other LatAm
(Colombia, Ecuador, Panama and
Peru)
South Africa
KO bottler in 21 African markets
Turkey, Russia, the CIS, Central

Asia and the Middle East
100% ownership
100% ownership
100% ownership Amalgamated Beverages

Industries (ABI)
KO brands
Pepsi brands in Panama
KO brands, Appletiser
November 2001 SAB becomes

the sole bottler for KO in
Honduras and El Salvador.
Acquisition of Bavaria 19 July

2005. Disposal of milk and juice
business in Panama in May 2013.
SAB bought out ABI minorities stake in 2004

and delisted the company from the JSE.
not disclosed
not disclosed
Sparkling 93% Stills 7% volume
not disclosed
Sparkling 73% Stills 20% NRTD

Tea 7%
SAB Miller
Key countries
Ownership
Own brands / KO brands
Recent acquisitions / disposals
Sparkling / Still
Own operations, JV with Castel 14

24.1% equity stake in Anadolu
markets, theough associated undertaking
Efes (100% consolidation of CCI)
(Delta) in Zimbabwe
KO brands, own brands
KO brands (via CCI)
Strategic alliance with Anadolu

Efes October 2011.
Volumes
18.5mhl (30% of LatAm volumes)
18.3mhl
(39% of South Africa volumes)
13.7mhl
(35% of Africa volumes)
14.8mhl
(25% of Europe volumes)
Revenues
USD 1,296m (c.23% of LatAm NPR)
not disclosed, est USD 1,373m

(c.34% of S Africa NPR)
not disclosed, est USD 1,033

(c.30% of Africa NPR)
USD 659m
(c.14% Europe NPR)
USD 259m (c.12% LatAm EBITA)
USD 254m
(c.25% of South Africa EBITA)
not disclosed, est USD 176m

(19% of Africa EBITA)
USD 75m
(c.11% Europe EBITA)
EBITA
Note: SABMiller Africa includes contribution from Castel

What are the opportunities?

CE Europe not an obvious area of interest
At the SABMiller European divisional seminar on 11 February 2014 the company
indicated that we dont see ourselves becoming a soft drinks producer. This would
appear to rule out SABMiller considering Coca-Cola Hellenic as a potential target.
Africa high on the list
As we identified earlier, the Coca-Cola bottling network in Africa is fragmented with c25
bottlers in the region. Following the formation of Coca-Cola Beverages Africa, we believe
that the company could look to take on Nigeria (from CC Hellenic). We believe that it is
more likely that CC Icecek will take on additional markets in the Middle East Africa
region, eg, Egypt, which is a joint venture between KO and a local partner.
22
Nomura |
28 November 2014
Nigeria a major opportunity

We would value the Nigerian business of CCH at approximately USD 1.6bn, applying a
15x EBITDA multiple (in line with CCI current valuation). The Nigerian business is
currently CCHs best performing market, with low single-digits volume growth in 9M14.
Fig. 20: Valuation for CCHs Nigerian business
CCH Nigeria 2013
Volume (muc)
Sales
(EUR m)
206
(USD m)
206
687
859
EBIT
45
57
Depreciation
EBITDA
41
87
86
108
Multiple
15.0x
15.0x
EV Nigeria division
1,300
1,624
SABMiller has a c10% beer market share in the Nigeria compared with Heineken at
65%and Diageo at 20%. The company acquired a business in Port Harcourt in 2009 and
another in Ilesha before building a new facility in Onitsha in 2012. An acquisition of the
Coke Nigerian business would significantly enhance SABMillers route to market in beer
in Nigeria, which would not be positive for Heineken or Diageo. Nigeria accounts for
c10% of Heineken profits, and c4% of Diageo.
Australia possible in the medium term?
We see Australia, with its large geography, as offering synergies between distribution of
beer and soft drinks, as well as back-office synergies. The company owns the numbertwo brewer in Australia. The Australian Coke franchise is with Coca-Cola Amatil. Longer
term, we can see potential synergies if these were to be combined.
Latin America possible in the medium term?
As the Coke bottler in El Salvador and Honduras, where it also has a beer business, the
company could look to extend into other markets, eg, Colombia and Peru where it has
major market shares. In Colombia the Coke bottler is Coca-Cola Femsa, in Peru it is a
family controlled quoted company Corporacion Lindley that also owns brands such as
Inca Cola and where KO has a 30% stake. We do not believe that the family is ready to
sell this business as the company has recently issued bonds to finance expansion.
N America unlikely
In theory, the company could participate in the US refranchising programme. However,
we see this as unlikely as the US beer business, MillerCoors, is jointly owned with
Molson Coors, which has no real interests in soft drinks.
23
Nomura |
28 November 2014
Appendix 1
The concentrate/bottler model
Division of responsibilities
The Coca-Cola system comprises KO and over 250 bottling partners.
KO manufactures and sells concentrates, beverage bases and syrups to bottling
operations. KO owns the brands and is responsible for consumer brand marketing
initiatives. Through BIG and in North America, the company also owns some bottling
operations.
Bottlers manufacture, package, merchandise and distribute the final branded beverage
to customers and vending partners, which then sell the products on to consumers.
Fig. 21: Division of responsibilities summary KO vs bottlers
TCCC
Brand ownership and marketing
Trademark ownership
Bottlers
Production
Produce TCCC produces
Global marketing
Supply of concentrate
Marketing / Commercial
Engage in local marketing
Engage in local promotional activities
Route to market
Establish business relationships with local
customers
Develop local distribution channels, e.g. invest in
coolers
Distribution
Distribute TCCC produces to retail either directly
or through distributors
Source: Nomura research
KO provides a number of important inputs to the bottlers business. We highlight the key
areas:
Marketing activity
KO is responsible for consumer marketing, which is most of the above-the-line (ATL)
marketing activity, as well as management of global accounts. Bottlers are responsible
for local/customer marketing, which is most of the below-the-line (BTL) marketing activity
such as customer activation at the point of sale. Bottlers are dependent on the
successful brand management of KO and the continued support in terms of marketing
investment in each of the bottlers markets. KO contributes to marketing investment on a
discretionary basis. Although that is formally discretionary, we believe that KO generally
agrees to support 50% of the total system marketing spend. Total marketing payments
made to bottlers accounted for under the equity method were USD 1,807m, USD 1,587m
and USD 1,147m in 2013, 2012 and 2011, respectively.
Purchase of concentrate
Bottlers incur their single largest expense in the form of concentrate purchases from KO
(bottlers buy the concentrate and then add water, sugar and carbonation, among other
ingredients, to produce soft drinks that are then distributed). For example, in 2013, the
concentrate purchases totalled 20% of net sales for Coca-Cola Hellenic, the secondlargest bottler by volume.
Setting of concentrate price
The general framework of concentrate pricing is largely driven by the companys ability to
take pricing in the local markets. KO generally determines the price of concentrate for all
of its brands for each country. The KO 10k sets out the following: under most of our
Bottlers Agreements we generally have complete flexibility to determine the price and
24
Nomura |
28 November 2014
other terms of sale of the concentrates and syrups we sell to our bottlers, as a practical
matter, our Companys ability to exercise its contractual flexibility to determine the price
and other terms of sale of its syrups, concentrates and finished beverages is subject,
both outside and within the United States, to competitive market conditions.
In theory, bottlers have little negotiating power on the price setting of its largest single
cost KO is entitled to determine the price of concentrate for all of the brands of KO for
each country at its discretion. In practice, however, KO normally sets prices after
discussions with bottlers so as to reflect trading conditions in the relevant countries and
to ensure that such prices are in line with each bottlers annual marketing plan. In the
longer term, KO seeks for an equitable split of profit between itself and the bottler.
Concentrate prices usually reflect a percentage of the bottlers net sales revenue,
otherwise called the incidence rate. That incidence-based pricing model largely
removes any currency exposure for the bottler (the majority of the concentrate is
purchased in local currencies); in addition, as it is value-based, it aligns brand owner and
bottler interests (both have an incentive to sell more premium packs). The amounts of
concentrate purchased from KO largely track overall volume growth.
Operating territory
Bottlers are authorised to sell KO trademark products in an identified exclusive territory.
KO will typically agree to refrain from selling or distributing, or from authorizing third
parties to sell or distribute its products throughout the identified territory. However, per
the 10-k, KO can: 1) produce product within a territory for sale outside of the territory,
and 2) sell product in the territory in any other manner or form, 3) handle key accounts
that cover multiple territories.
Operating income split between bottler and concentrate owner
Fig. 22 set outs our estimate of the average P&L for the franchisor and the bottler. As it
shows, we believe that the average profit per case is slightly higher for the bottler,
although that does vary by region.
Fig. 22: Simple P&L bottler, concentrate and system
Bottler
$/case
Concentrate
% of rev
$/case
% of rev
System
$/case
% of rev
Revenues
4.23
0.81
4.23
COGS: Incidence
0.81
19%
Other COGS
1.72
41%
0.18
22%
1.87
44%
Gross Profit
Opex
Op Inc
1.70
1.26
0.43
40%
30%
10%
0.63
0.28
0.35
78%
34%
44%
2.33
1.54
0.79
55%
36%
19%
Source: Nomura research
But no single model

We believe that there is no standard bottler contract; there may be different rates for
different packs (say lower rate for large pack PET and higher rate for smaller immediate
consumption packs). In addition, the incidence pricing model (where concentrate is
priced as a percentage of revenues) is not in place universally. There is a wide variety of
mechanisms for charging for concentrate even if the incidence model is used. For
example, incidence can be against gross revenue (pre discounts) or net revenue (after
discounts), and can vary by pack size.
In addition, there are some fundamental differences between contracts in the US and
non-US. Many US contracts have no term, whereas non-US contracts are usually for a
fixed term (often what is referred to as the 10 plus 10 years contracts). That has
become less of an issue with the buy-in of most of the US bottling franchise from CCE in
2010 as 88% of US volumes are now within the wholly-owned CCR business.
25
Nomura |
28 November 2014
Fig. 23: Key differences between international and US bottler agreements

Bottlers agreements
Inside USA
Outside USA
Scope
Bottler agreements cover non-CCR sales (11% of US unit

case volume)
Bottler agreements cover non-Bottling Investment Group

sales (~87% of volume)
Production and
distribution
In some contracts, bottlers do not have comprehensive

Bottlers have exclusive production and distribution rights in
beverage production rights (bottler serves just the
granted territory
distribution function on a nonexclusive basis)
Contract duration
Fountain beverages
Pricing
No stated contract expiration for Trademark Coca-Cola

beverages; other sparkling and still beverages have a
stated contract duration
All contracts have stated duration
Contracts with stated duration subject to extension or

renewals of terms
Contracts subject to extension or renewals of terms
Contracts subject to termination on certain events (varies

by contract, generally certain events of default)
Same as USA. Contracts subject to termination on certain

events (varies by contract, generally certain events of
default)
Fountain syrups are manufactured by TCCC and sold to

fountain retailers, wholesale partners and bottlers
Fountain syrups are manufactured by bottlers on a

nonexclusive basis
Majority of contracts based on incidence pricing model

(incidence is % of net sales to be determined by factors
such as pricing, distribution channels and package mix)
Same as USA. Majority of contracts based on incidence

pricing model (incidence is % of net sales to be determined
by factors such as pricing, distribution channels and
package mix)
For 5.6% of volume, contracts provide baseline price, which

is adjusted quarterly according to pricing formula upto a
ceiling
For 0.3% of volume, contracts based on fixed concentrate
price, which is readjusted quarterly based on sugar prices
26
Nomura |
28 November 2014
27
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28 November 2014
28
Nomura |
28 November 2014
Appendix A-1
Analyst Certification
I, Ian Shackleton, hereby certify (1) that the views expressed in this Research report accurately reflect my personal views about
any or all of the subject securities or issuers referred to in this Research report, (2) no part of my compensation was, is or will be
directly or indirectly related to the specific recommendations or views expressed in this Research report and (3) no part of my
compensation is tied to any specific investment banking transactions performed by Nomura Securities International, Inc.,
Nomura International plc or any other Nomura Group company.
Issuer Specific Regulatory Disclosures

The term "Nomura Group" used herein refers to Nomura Holdings, Inc. or any of its affiliates or subsidiaries, and may refer to one or more
Nomura Group companies.
Materially mentioned issuers

Issuer
Anheuser-Busch InBev
Carlsberg
Coca-Cola Enterprise
Coca-Cola Hellenic
Coca-Cola Icecek
Heineken
The Coca-Cola Company
SABMiller
Ticker
ABI BB
CARLB DC
CCE US
CCH LN
CCOLA TI
HEIA NA
KO US
SAB LN
Price
EUR 92.90
DKK 545
USD 43.85
1439p
TRY 49.85
EUR 61.70
USD 44.27
3490p
Price date
24-Nov-2014
24-Nov-2014
24-Nov-2014
24-Nov-2014
24-Nov-2014
24-Nov-2014
24-Nov-2014
24-Nov-2014
Stock rating
Neutral
Neutral
Neutral
Reduce
Neutral
Neutral
Buy
Neutral
Previous rating
Reduce
Buy
Reduce
Neutral
Buy
Reduce
Not Rated
Reduce
Date of change Sector rating

15-Jan-2014
Bearish
21-Aug-2014
Bearish
06-Oct-2014
Bearish
29-Oct-2013
Bearish
15-Jan-2014
Bearish
21-Jul-2014
Bearish
29-Apr-2014
Bearish
19-Sep-2014
Bearish
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29
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The Coke bottling network

EQUITY: EUROPEAN BEVERAGES

De-Coking the system

Global Markets Research

Identifying potential moving parts

The Rolls Royce distribution system

Coca-Cola Icecek (Neutral TP TRY 46) potential to consolidate in Middle-

East and India could be positive.

SABMiller (Neutral TP GB 3,450p) potential to be the consolidator for

CCH (Reduce TP GB 1,100p) could be at risk of losing some franchises in

Heineken (Neutral TP EUR 58) less likely to be a Coke consolidator in

The Coke bottling network

The Coke bottling network

The Coke bottling network

The Coke bottling network

Fig. 2: Estimated system EBIT by region Coke vs bottlers

Total concentrate EBIT

Total bottling EBIT

Source: Company data, Nomura research

Source: Company data, Nomura research

Below we set out the global split of the bottler network:

Note: the chart is pre the SAB-SABCO deal announced on 27 November

In Appendix 1 we set out how the concentrate/bottler model works.

The Coke bottling network

Source: Company data, Nomura research

The Coke bottling network

The Coke bottling network

Note: Canada is entirely covered by CCR

The Coke bottling network

Source: Company data, Nomura estimates

The Coke bottling network

The Coke bottling network

Potential impact on bottlers

Source: Company data, Nomura estimates

The Coke bottling network

The Coke bottling network

Coca-Cola Hellenic (Reduce TP 1,100p)

The Coke bottling network

Coca-Cola Icecek (Neutral TP TRY 46)

The Coke bottling network

The Coca-Cola Company (Buy TP USD 54)

Muc = Million unit cases

The Coke bottling network

Fig. 12: Global soft drinks volume growth vs GDP growth

Global beer volume growth

Global GDP growth

World soft drinks %yoy

Source: Company data, Euromonitor, Plato Logic, IMF, Nomura research

Source: IMF, Euromonitor, Nomura research

Fig. 13: Emerging market beer volume vs GDP growth

Fig. 14: Emerging market soft drinks volume vs GDP growth

Emerging beer volume growth

Emerging market GDP growth

Source: Company data, Euromonitor, Plato Logic, Nomura estimates

Emerging Markets GDP %yoy

Emerging Markets Soft Drinks %yoy

Source: UN National Accounts Statistics, Euromonitor, Nomura research

The Coke bottling network

Guarana Antarctica, Pepsi

Via subsidiary Schw eppes Australia

Soft drinks c.2% group volum es

Lao Brew ery Co Ltd, JV w ith government

Vrumona, subsidiary since 1968

Current franchise volumes c.3mhl