Market Likes CCA Sale

By Glenn Dyer | More Articles by Glenn Dyer

With the burden of its South Korean adventure soon to be behind it, the market has re-marked the shares in Coca Cola Amatil, boosting them by more than three per cent yesterday.

The shares jumped to $9.54, up 33c after news late Friday of a probable deal with a South Korean buyer.

The market shrugged off the losses of $50 million or so on the investment, with a couple of analysts yesterday wondering why it was so small, given the investment values, as they understood them

"CCA announces that it has entered into exclusive negotiations in relation to the proposed sale of CCA's South Korean business with its preferred bidder, LG Household and Health Care," the company said in its statement.

"CCA and LG Household and Health Care have entered into a non-binding Memorandum of Understanding. The final terms of the sale are being negotiated and will be embodied in a binding sale and purchase agreement.

"For the guidance of the market, the final purchase price which is calculated by an agreed formula is likely to be in the range of $520 million to $545 million, including net debt, based on current exchange rates.

"Should this transaction proceed to completion, CCA will record a loss on book value of between $25 million and $50 million.

"Both parties are focused on moving quickly towards finalisation of the transaction, which we expect to take place within the next 3 months, subject to all regulatory and other approvals, and final approval by the Boards of CCA and LG Household and Health Care."

That produced comments from some brokers that as speculation had the sale price much lower, the price looks satisfactory. That sounds like CCA or someone close to it, has been doing a good job in massaging market expectations lower so that the eventual result looks OK, despite the loss.

Merrill Lynch for example told clients that $520m-$545m likely to be received, leads to "a $10m NPAT reduction to our forecast FY08 NPAT – from $444m to $434m.

"We are surprised that the book loss is estimated to be only $25m to $50m. We thought net book value was $700m not $570m. It appears that CCL has made some accounting "quirks" around the asset value and FX translation reserve revaluation to reach a final book value of $570m.

"Overall, we consider this sale price for South Korea as a positive.

"Although slightly below our assumed price, $520-$545m should alleviate concerns toward Coke Amatil – as the South Korean business under Coke Amatil's ownership was deteriorating rapidly."

'Better than expected' seems to have been the common response from analysts and the share price reacted accordingly

Merrills added that "We believe that Coke Amatil is a very attractive investment – more so now its Korean business has been sold. Its underlying businesses in Australia, New Zealand and Indonesia are currently all performing very well.

"To us, it is far more important for the underlying businesses to be performing better than for the company to miss out on $170m in a one off sale transaction."

Meanwhile LG Household & Health Care says it will look to sell part of its new business to Coca-Cola Co.

A South Korean online news provider EDaily quoted an LG source as saying on Saturday that the company was planning to sell some shares in the unit to Coca-Cola, once the deal closed, to secure basic liquids from the US company.

Basic liquids means the concentrate for Coke and its other drinks. It's one of the reasons why Coca Cola maintains a 35 per cent stake in Coca Cola Amatil.

Coca-Cola Amatil earned $18 million in 2006 in South Korea, up from a loss of $9.2 million a year earlier, helped by a $7.5 million profit on the sale of properties.

Amatil bought into Indonesia, the Philippines and South Korea as part of a big re-organisation of its interests about eight years ago.

The Philippines has been sold, while after a rocky start, Indonesia now seems to be doing well for the Australian company.

Truth be known that after the opportunity cost, the lost value on the share price and operating losses over time, South Korea has been an unmitigated disaster for CCA and the market is glad the company is going to be exiting.


About Glenn Dyer

Glenn Dyer has been a finance journalist and TV producer for more than 40 years. He has worked at Maxwell Newton Publications, Queensland Newspapers, AAP, The Australian Financial Review, The Nine Network and Crikey.

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