Daily Ticker

Hell hath no fury like a shareholder scorned: David Winters stirs the pot at Coke (again)

Aaron Task
Daily Ticker

Shares of Coca-Cola (KO) jumped Tuesday, at least briefly, after David Winters, CEO of Wintergreen Advisers, told Fox Business that Warren Buffett's Berkshire Hathaway and Brazil's 3G Capital might take the company private, just as they did last year with Heinz.

Winters also wrote a letter to three independent directors of Coke's board in which he expressed "grave concerns...regarding potential conflicts of interests at Coca-Cola."

After trading as high as $41.20 early Tuesday, Coke's gains receded -- the stock closed up 0.6% at $40.92 -- after Warren Buffett told CNBC there was “absolutely no chance” of a Coca-Cola buyout. Most observers scoffed at the idea of a leveraged buyout for a company with a market cap near $180 billion. By comparison, that's more than three-times the inflation-adjusted value of KKR's 1989 buyout of RJR Nabisco, according to Business Insider. Furthermore, while Coke shares have underperformed both the S&P 500 and arch-rival Pepsi in recent years, its valuations don't suggest a stock that has been abandoned by the public market.

But Winters insists an LBO of Coke isn't so far-fetched, citing Berkshire's cash, 3G's cash and the reality of cheap borrowing costs.

He declined to provide specifics on a funding model for such a deal, or what price would make sense for shareholders, including his firm.  Instead, Winters cited comments from Warren Buffett at the 2014 Berkshire annual meeting that "we haven't bought Coca-Cola, yet" and that the Heinz deal "created a partnership template" that could be used for future transactions.

In addition, the fund manager notes Brazilian media reports (unconfirmed and unsourced) that 3G's Jorge Paulo Lemann suggested to Buffett they consider partnering on a play for Coca-Cola.  

Which brings us back to Winters' "grave concerns" about conflicts of interest at Coca-Cola. Specifically, he cited the "very excessive and dilutive" executive compensation plan that the fund manager raised as an area of concern ahead of Coke's annual meeting in April. The plan contains a change-of-control provision that would result in immediate vesting to Coke's top management and board.

Related: Coke's compensation plan is "outrageous" and "excessive": Wintergreen's David Winters

In addition, Winters notes that Warren Buffett's son Howard is on Coke's board of directors. "The question is: what kind of information flows back and forth here?" he asks in the accompanying video.

As I Tweeted Tuesday morning, it appears that Winters has gone from asking Buffett for help on Coke's compensation plan to now questioning his integrity after the 'Oracle of Omaha' wouldn't join the campaign (at least not publicly). Hell hath no fury like a shareholder scorned, I guess.

But Winters says he's not accusing (either) Buffett of wrongdoing. Instead, he says "there's the potential here" for Coke shareholders to get shafted, just as he claims happened to Heinz shareholders last year.

The 2013 deal to take Heinz private came at 20% premium to the company's shares at the time, but Winters notes there was no "go-shop" period for Heinz to solicit other potential bids.  

In his letter to Coke's board members, he writes: “We are concerned that a similar type of sweetheart, insider deal for Coca-Cola [as occurred with Heinz] could, in our opinion, significantly undervalue Coca-Cola and irreparably harm Coca-Cola shareholders.”

On the other hand, Winters notes Heinz's performance "radically improved" after the Berkshire-3G takeover, which, he says begs the question: "Is there an opportunity here for Coca-Cola's operating profits to be improved dramatically and for the debt to be paid down rapidly in an environment when you can borrow money very cheaply?"

Winters clearly thinks there is, even if  a Coke buyout seems like a far-fetched idea just now.

Aaron Task is the host of The Daily Ticker and Editor-in-Chief of Yahoo Finance. You can follow him on Twitter at @aarontask or email him at altask@yahoo.com.

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