Coca-Cola Amatil (CCA) and its major shareholder, Atlanta-based The Coca-Cola Co, have refused to confirm or deny they might be interested in Lion Dairy & Drinks, which is expected to be formally put up for sale when a strategic review is completed in mid October.
However, Citigroup’s head of research, Craig Woolford, says the acquisition of Lion’s dairy, fruit juice, plant-based beverage and yoghurt brands and cold supply chain would make sense for CCA, helping the bottler plug glaring gaps in its product range and accelerate sales growth as consumers shift away from carbonated soft drinks.
«Lion Dairy & Drinks could be a good acquisition for Coca Cola Amatil,» Mr Woolford said in a report on Thursday.
The dairy and juice categories are estimated to be worth $2 billion in wholesale sales in Australia – dairy $900 million and juice $1.1 billion – but CCA’s share of these categories is only 4 per cent, a fraction of its 40 per cent share of the total $5 billion soft drink market.
Juice, dairy and plant-based beverages account for only 4 per cent of CCA’s sales, while carbonated soft drinks (CSD), which have been in decline for years, account for 71 per cent of sales and bottled water 14 per cent.
«With high prices and substantial market share in carbonated soft drinks, we believe Amatil needs to expand in non-carbonates,» Mr Woolford said.
«Juice is a challenging category, but dairy is in growth and both ready-to-drink coffee and functional beverages also offer growth options with good price realisation,» he said.
Mr Woolford estimated an acquisition would cost between $800 million and $900 million, representing a multiple of 18.5 to 21 times earnings before interest and tax. It would boost sales by 19 per cent in the medium term and would be value accretive.
CCA could fund an acquisition with debt and potentially reduce the upfront cost by selling the brand names to The Coca-Cola Co, which has been buying a slew of non CSD drinks as part of its transformation into a total beverage company.
Competition concerns
Citigroup estimates that a Lion acquisition would reduce CCA’s exposure to CSDs to 60 per cent and increase sales from fruit juice and dairy to 16 per cent or 8 per cent each.
Kirin would need to be prepared to break up the Lion Dairy & Drinks, which also owns Pura and Dairy Farmers milk, King Island, South Cape and Mersey Valley cheese and Famers Union and Yoplait yoghurt.
CCA would also have to overcome competition concerns.
The Australian Competition and Consumer Commission blocked CCA’s proposed acquisition of Berri Juice in 2003, saying an acquisition would substantially lessen competition because of the complementary nature of the products and CCA’s dominance in distribution.
Mr Woolford said CCA’s market share after an acquisition of Lion’s brands would be high but not as high as it would have been 15 years ago.
«There is additional competition in juice, and water has become a much larger part of the market,» he said. «Retail customers have also consolidated significantly since 2003.»
Morgan Stanley analysts have also said CCA is a likely buyer of LIon’s dairy and juice brands if Kirin decides to sell.
In a report this month Morgan Stanley CCA’s new Australian Beverages chief, Peter West, ran Lion Dairy & Drinks until January 2018 and would have strong insights into potential synergies and areas for improvement of the business.
CCA could better leverage its extensive distribution network with the inclusion of incremental brands and enhance its cold chain distribution capabilities.
CCA’s only milk brand is Barista Bros and the acquisition of Lion’s Dare, Big M and Farmers Union brands would significantly improve its value-added milk offer, Morgan Stanley said.