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Coca-Cola's Corporate Strategy Is Divide and Conquer --- The
'49% Solution' Reshapes The Company's Conglomerate
Structure

Wall Street Journal [New York, N.Y] 08 Oct 1987: 1.

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Some Coca-Cola Co. insiders call the strategy the "49% solution." Investment bankers refer to it as
subsidiary public offerings and see it increasingly as a hot new restructuring tool.
In the past year, Coca-Cola has pulled off an innovative financial restructuring, selling to the public
51% of two bottling companies and announcing plans to do the same with its entertainment unit.
Coca-Cola retains the remaining 49% interest, a formula that enables it to keep effective control over
the businesses while it concentrates on its core soft-drink and foods operations and sweeps a total of
$3 billion of debt off its books.
Of course, such relationships pose potentially tricky conflict-of-interest issues for managements of
both parent and offspring. And thus far, Coca-Cola Enterprises Inc., the big bottling concern, hasn't
exactly overwhelmed Wall Street: In composite trading on the New York Stock Exchange yesterday,
its shares closed at $18.25, down 12.5 cents, after going public at $16.50 last November.

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Some Coca-Cola Co. insiders call the strategy the "49% solution." Investment bankers refer
to it as subsidiary public offerings and see it increasingly as a hot new restructuring tool.
Whatever the label, it is reshaping the soft-drink giant into what may be the prototype post-
1980's conglomerate -- a company that goes back to basics but retains big stakes in
diversified businesses while assuming little risk.
In the past year, Coca-Cola has pulled off an innovative financial restructuring, selling to the
public 51% of two bottling companies and announcing plans to do the same with its
entertainment unit. Coca-Cola retains the remaining 49% interest, a formula that enables it to
keep effective control over the businesses while it concentrates on its core soft-drink and
foods operations and sweeps a total of $3 billion of debt off its books.
At the same time, the new companies get independent access to equity markets to satisfy
their own voracious appetites for capital. In theory, all concerned will eventually get better
treatment from the stock market. "We are trying to provide the businesses with the best
capital structure with which to grow," says Roberto C. Goizueta, Coca-Cola's chairman and
chief executive officer.
Of course, such relationships pose potentially tricky conflict-of-interest issues for
managements of both parent and offspring. And thus far, Coca-Cola Enterprises Inc., the big
bottling concern, hasn't exactly overwhelmed Wall Street: In composite trading on the New
York Stock Exchange yesterday, its shares closed at $18.25, down 12.5 cents, after going
public at $16.50 last November.
Nevertheless, other companies are already taking similar steps. McKesson Corp. has
brought two units public in the past year. Sonat Inc. recently announced it was offering a big
piece of its offshore drilling business to the public. In moving to acquire Allegis Corp.'s Hertz
unit, Ford Motor Co. said last week it might eventually take the company public while
retaining a minority stake.
In the past month, three telephone companies have announced plans to take public parts of
their cellular-telephone units, while retail analysts have been encouraging more retailers to
follow the lead of Zayre Corp., which recently spun off part of its T.J.X. Cos. specialty retail
unit.
"We'll be seeing this in any situation where a company is engaged in two or more activities,
one of which is prosaic and the other of which is sexy," says Robert Willens, senior vice
president at Shearson Lehman Brothers.
Based in part on the fall from favor of conglomerates, the restructurings stem from the same
theory that has driven much of Wall Street's takeover binge -- that the pieces broken up are
worth more than the whole. Indeed, the strategy can serve as a potent takeover defense,
both by beating the raider at his own game of uncovering hidden values in conglomerates
and by creating a confusing web of entanglements with the new publicly held units that could
create layer upon layer of poison pills. "It is something we regularly discuss with our clients
as a possible takeover defense," says William Strong, a managing director at Salomon
Brothers.
Moreover, these subsidiary sales can create an instant war chest for the company that
spawns them by sweeping debt off the parent's balance sheet, increasing borrowing
capacity.
Indeed, once the soon-to-be-formed Columbia Pictures Entertainment Inc. is established,
Coca-Cola's debt-to-capital level will be just 12%, and it could borrow as much as $1.3 billion
before hitting a self-imposed debt ceiling. Coca-Cola has cash and marketable securities of
about $1.6 billion and an annual cash flow of about $1 billion.
Not surprisingly, those numbers have fueled recent rumors that Coca-Cola might be
interested in acquiring such concerns as Time Inc., Beatrice Cos., Hershey Foods Corp, and
Walt Disney Co. Some industry analysts are sure it will make a big acquisition to supplement
its flagging food business, and then maybe spin off that to the public, too.
"Don't hold your breath," says Mr. Goizueta, who says Coca-Cola isn't looking to buy any of
the above. "If all these smart analysts would just tell me what is a smart company for Coca-
Cola to buy, I'll take a look, I promise. But we haven't seen one."
For all the slick financial moves, Coca-Cola doesn't plan to turn into a portfolio-manager style
company, buying and selling businesses. Its executives say they are intent on managing
what's left in the store, not radically changing the company's business mix. "We are
operators here; we are not asset players," says Donald R. Keough, president and chief
operating officer. "We have no hidden agenda."
One big item on the open agenda: creating an international soft-drink fountain business, a
foray that will require a lot of capital. In addition, Coca-Cola is in the midst of restructuring its
international bottling operations, to boost that sector in which it sees its greatest growth
potential. Mr. Goizueta says the company is more apt to make acquisitions in the $50 million
to $100 million range to achieve some of those goals than to make a major purchase.
Neither does he see major acquisitions in the offing for Coca-Cola's foods business, even
though he acknowledges that sector's performance has been a "black eye" for the company.
A new chief executive, Harry Teasley Jr., was installed to revitalize it earlier this year. Mr.
Goizueta maintains that the asking price for food companies is too dear. "Let the real food
company stand up; we'll take a look at it," he says. "But if there is one out there, we haven't
seen it yet."
Nor does he see the foods division as a whole a likely candidate to go public, although
portions -- like its orange groves -- may eventually be. After all, the foods division is similar to
the company's soft-drink business, as it is a potential provider of high returns and doesn't
require heavy capital investments.
Indeed, company employees are fond of describing its traditional business of making and
selling its secret-formula syrup as "a license to print money" -- high in profit margins and low
in capital requirements.
But the acquisitions of Columbia Pictures in 1982 and of two of the nation's biggest Coca-
Cola bottlers in 1986 changed the mix. The bottler acquisitions last year had added $2.4
billion of debt to Coca-Cola's books, and the suddenly gigantic new bottling concern would
eventually need more big outlays for acquisitions, plants and trucks. The entertainment
business, coming off three years of tremendous profit growth, would also need more capital
as it headed into a period in which some of its executives believed growth would be more
difficult.
Both would benefit from a target level of debt to capital more in the range of 60%, having
their own access to equity markets, and freedom from Coca-Cola's more conservative
financial guidelines.
Moreover, Coca-Cola executives say they believe the company's businesses will get better
treatment from Wall Street if judged on their own. For one thing, entertainment companies
tend to trade at different multiples from soft-drink bottlers or syrup makers. For another,
analysts' concerns that Coca-Cola might be about to make another big entertainment
acquisition were believed by some to have had a damping effect on the company's stock
price.
Further, in the eyes of Coca-Cola executives, the movie business gets much more than its
share of public and investor attention. A blockbuster like "Ghostbusters" or a flop like "Ishtar"
can get far more ink and attention than the fundamentals of soft drinks -- and, some believe,
more than proper weighting in the price of Coca-Cola's stock. "In the movie business,
perceptions are more important than fact," says Mr. Goizueta. Too often, he says, "we are
judged by how the movies are doing in the theater."
Of all Coca-Cola's publicly traded offspring, only Coca-Cola Enterprises has a track record.
T.C.C. Beverages Ltd., the company's Canadian bottling operations, just went public last
week. Despite Coca-Cola Enterprises' tepid reception by the stock market, it has achieved
Coca-Cola's major goals for the unit -- getting it out on its own but still not too far.
And the bottling business is moving probably more quickly on its own to consolidate, pare
down, close plants and boost efficiencies than it might have as part of a larger parent. "We
are doing what we said we would," says Brian G. Dyson, president and chief executive. Says
a competitor, "Coca-Cola Enterprises gives them tremendous go-forward energy."
The downside to all this, however, is the creation of tricky management relationships,
especially in cases like Coca-Cola's where the parent becomes a minority shareholder. "It
raises some serious operational problems," says Mr. Strong, of Salomon Brothers, pointing
out that Coca-Cola and the new publicly traded units must "keep business relationships at an
arm's length basis." For many of his clients considering such moves, he says, "it is a difficult
issue."
And, notes the competitor soft-drink executive, the interests of Coca-Cola -- dubbed Big
Coke in the industry -- and Coca-Cola Enterprises -- Little Coke -- might conflict on any
number of issues, such as new products, marketing expenditures and the price Little Coke
has to pay for Big Coke's concentrate.
Coca-Cola executives say they aren't worried about the issue. "We operate these impeccably
from a legalistic point of view," says Mr. Keough, who is also chairman of Coca-Cola
Enterprises. And Mr. Dyson says he hasn't had any major run-ins with Coca-Cola, though he
concedes that his previous tenure as a longtime company executive contributes to smooth
relations. "If it were somebody else in my shoes who didn't have my past experience and
knowledge, it would be a very difficult task," he says.
---
The Reconstructed Coca-Cola and Affiliates
Projected as of year-end 1987, dollar amounts in billions
DEBT TO
DEBT EQUITY CAPITAL CAPITAL LEVEL
Coca-Cola Co. $ .45 $3.2 $3.65 12%
Coca-Cola Enterprises
Inc. 2.1 1.65 3.75 56
Columbia Pictures
Entertainment Inc. .63 1.01 1.64 38
T.C.C. Beverage Ltd. .14 .16 .3 46
Credit: Staff Reporter of The Wall Street Journal
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Coca-Cola's Corporate Strategy Is Divide and Conquer --- The '49%
Solution' Reshapes The Company's Conglomerate Structure
Wall Street Journal
1
0
1987
Oct 8, 1987
1987
Dow Jones&Company Inc
New York, N.Y.
/ United States
Business And Economics--Banking And Finance
ISSN 00999660
Newspapers
English
NEWSPAPER
ProQuestID 398008453
URL http://search.proquest.com/docview/398008453?accountid=14797
Copyright Dow Jones&Company Inc Oct 8, 1987
2010-06-26
2
-ABI/INFORM Complete
-ProQuest Central


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