Fitch: No Rating Implications from Coca-Cola's Announced Bottling Merger Agreement

CHICAGO--()--Fitch Ratings does not expect any rating implications from The Coca-Cola Company's announcement that it has contributed its German operations, Coca-Cola Erfrischungsgetranke AG, into a joint venture agreement with two of its Western European bottlers, Coca-Cola Enterprise Inc. and Coca-Cola Iberian Partners. The new combination, named Coca-Cola European Partners (CCEP), will serve over 300 million consumers in 13 countries.

Coca-Cola's long-term Issuer Default Rating (IDR) is 'A+' and short-term IDR is 'F1'. The Rating Outlook is Negative. A full list of ratings follows at the end of this release.

Coca-Cola has not disclosed financials related to Germany, but Fitch does not expect the transaction to have a material financial impact on Coca-Cola operating earnings. Coca-Cola will receive an 18% interest in CCEP in exchange for the German operations. Fitch views the new bottling combination of CCEP that will have pro forma 2015 revenue and EBITDA of $12.6 billion and $2.1 billion respectively, as a positive step toward improving the sustainability of cash generation for the Coca-Cola System's underlying business operations in Western Europe. As such, Coca-Cola's segment results should benefit longer-term as its largest independent bottler improves its strategic operating profile.

Coca-Cola's European bottling business has faced persistent headwinds caused by a macro environment characterized by reduced consumer spending, higher unemployment and the negative effects of austerity programs in Western Europe. In addition, structural challenges due to health and wellness trends are affecting the demand for carbonated soft drinks in developed markets. The challenging environment thus places more importance on the need for Western European consolidation.

The merger increases operational scale, creates synergy opportunities, better leverages best practices and improves operational strategy across 13 contiguous countries. This should improve efficiencies, thus increasing CCEP's ability to invest behind the brands. Fitch believes The Coca-Cola Company's 18% ownership position, which includes two board seats, should also enhance the strategic alignment within the Coca-Cola system between the two companies. The transaction is expected to close in the second quarter of 2016.

The Negative Outlook reflects Coca-Cola's elevated gross leverage of 3.4x on a total debt-to-operating EBITDA basis for the first half of 2015, up from 2.8x at the end of 2013. Since 2010, total debt has increased by approximately $21 billion to $44 billion at the end of the second quarter 2015.

Coca-Cola does not generate sufficient domestic cash combined with dividend and royalties from international sources to fund domestic cash requirements for the dividend, U.S. capital investment, share repurchase program and strategic M&A activities. The company has also been reluctant to repatriate foreign earnings given the tax consequences. Consequently, the past growth in total debt including Coca-Cola's large commercial paper balances, is due to domestic borrowing as a large portion of the firm's cash flows are generated off-shore.

CURRENT RATING SENSITIVITIES

Positive: Future developments that may, individually or collectively, lead to a positive rating action include:

Fitch currently does not anticipate a positive rating action given Coca-Cola's high financial leverage.

Negative: Future developments that may, individually or collectively, lead to a negative rating action include:

A lack of progress toward developing and implementing an appropriate longer-term plan during the next 12 months to reduce aggregate debt balances including CP that would lead to an improved financial structure. Parameters of a deleveraging plan could include the following:

--Meaningful debt reduction from 2015 debt levels of at least 10%. Longer-term rating expectations are for Coca-Cola to maintain supplemental adjusted EBITDA net leverage of approximately 2x or less;

--Long-term gross leverage of approximately 3x or less;

--An improved long-term alignment of domestic cash availability versus domestic cash requirements such that Coca-Cola does not need to meaningfully increase total debt on an annual basis to fund domestic cash needs;

--A less aggressive financial strategy related to dividend and share repurchases;

--A reduction in commercial paper reliance. At July 3, 2015, commercial paper balances totaled approximately $16 billion or 36% of the firm's total debt.

If Coca-Cola successfully executes a deleveraging plan, Fitch could affirm the ratings with a Stable Outlook.

Other factors that could individually or collectively, lead to negative rating action include:

--Large debt-financed acquisition;

--Coca-Cola materially underperforms Fitch's expectations for organic growth including volume and price/mix;

--Further slowing growth in emerging and developing market regions;

--Margin erosion from channel mix shifts, competition, increased spending that result in reduced profitability;

--Lack of progress with executing on productivity based initiatives;

Fitch currently rates Coca-Cola and its subsidiary as follows:

The Coca-Cola Company

--IDR 'A+';

--Bank credit facilities 'A+';

--Senior unsecured debt 'A+';

--Short-term IDR 'F1';

--Commercial paper 'F1'.

Coca-Cola Refreshments USA, Inc. and Coca-Cola Refreshments

Canada, Ltd. (CCR)

--Long-term IDR 'A+';

--Senior unsecured debt 'A+'.

The Outlook is Negative

Additional information is available at 'www.fitchratings.com'.

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Contacts

Fitch Ratings
Primary Analyst
Bill Densmore
Senior Director
+1-312-368-3125
Fitch Ratings, Inc.
70 W. Madison Street
Chicago, IL 60602
or
Secondary Analyst
Carla Norfleet Taylor, CFA
Senior Director
+1-312-368-3195
or
Media Relations:
Sandro Scenga, +1 212-908-0278
sandro.scenga@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Bill Densmore
Senior Director
+1-312-368-3125
Fitch Ratings, Inc.
70 W. Madison Street
Chicago, IL 60602
or
Secondary Analyst
Carla Norfleet Taylor, CFA
Senior Director
+1-312-368-3195
or
Media Relations:
Sandro Scenga, +1 212-908-0278
sandro.scenga@fitchratings.com