Following 3-Way Merger, Goldman Initiates Coca-Cola European Partners At Buy

Three Become One

Coca-Cola European Partners (CCEP) now becomes the largest independent Coca-Cola bottler in the world on a revenue basis, with roughly €11 billion of revenue. As part of the transaction announced on August 6, 2015, CCE shareholders received a $14.50 a share cash payment and 48 percent stake in CCEP, with KO at an 18 percent stake, and CCIP at a 34 percent stake.

Related Link: Coca-Cola Streamlines Global Structure To Align Its Operating Units

Shares of Coca-Cola European Partners are expected to start trading under the ticker symbol CCE simultaneously in Amsterdam, New York and London, on Tuesday, May 31, 2016, at 15:30 CEST/9:30 a.m. EDT/14:30 BST.

Buy Thesis

"Our Buy thesis is predicated on (1) sizable margin improvement from highly visible cost synergies; (2) double-digit EPS growth outlook over the next three years driven by margin gains and de-leveraging; and (3) potential for a positive multiple re-rating (currently at 15X NTM P/E) as EPS growth accelerates and FCF steps up," analyst Judy Hong wrote in a note.

Expectation Figures

Hong projects CCEP's pro-forma operating margins to expand by 290bps by 2018, driven mostly by €340 million of cost synergies from the deal. The analyst also forecast CCEP's EPS to grow at a 12 percent CAGR over the next three years, off of a pro-forma 2015 EPS base of €1.90.

For FY16/17/18, Hong expects EPS of $2.40/$2.58/$2.95 and EUR-based EPS estimates are €2.05/€2.30/€2.63. The analyst expects the company to deliver strong EPS growth on high-single-digit EBIT growth and lower interest costs from de-leveraging.

"We see CCE benefiting from increased consolidation of KO's bottling network, outsized EBIT growth from realization of cost synergies, and upside optionality over time on potential for top-line improvement and further consolidation opportunity," Hong highlighted.

Although the analyst models only modest sales growth, Hong sees "potential for stronger sales acceleration in 2017/18 on improving macros and better alignment" with The Coca-Cola Co KO. Moreover, the analyst noted that CCEP "could be a platform to consolidate/swap additional territories in broader Europe."

Catalysts

Further, Hong said CCEP would have reduced impact from the market volatility as its revenue profile is more balanced geographically across Western Europe.

"We also believe CCEP should benefit from dominant share across Western Europe, with KO's overall CSD sales market share of 55 percent; by country, share is strongest in France (72 percent), followed by Sweden (67 percent) and Belgium (62 percent), with room to grow share in Germany (41 percent)," Hong said.

"From an alternate category perspective, we also see CCEP positioned well to grow KO share across growing categories like Bottled Water (current 4 percent share across Western Europe) and Sports & Energy (20 percent, including Monster brands)," Hong added.