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Coca-Cola Enterprises, Inc. Message Board

  • canucanoe1 canucanoe1 Nov 5, 2008 10:31 AM Flag

    Lookee here, Another Off Balance Sheet Entity?

    I'm surprised. Nobody mentioned the below news item yesterday.

    What exactly is a "supply chain management company". Isn't that what CCE is supposed to be?

    Looks like another off balance sheet entity, another special purpose vehicle, being created. Short term, it hides the mess. Long term, ???

    This was a trial balloon, imo. I just can't believe that with KO already abusing its off balance sheet entities, the anchor bottlers, that a beneficial solution for CCE shareholders is another one.

    C'mon now, someone on this board must know what this entity contributes in value added to the CCE shareholder. Just what is it?

    Analyst: Coke, bottler to reach deal by year-end
    Tuesday November 4, 2:08 pm ET
    Morgan Stanley analyst says Coca-Cola and its biggest bottler may form a new company

    NEW YORK (AP) -- A Morgan Stanley analyst told investors that Coca-Cola Co. and its biggest bottler, Coca-Cola Enterprises, are likely to form a supply-chain management company by the end of the year.

    "We see investors acting positively toward the renewed 'harmony' given the reaction to (Coca-Cola's) actions toward CCE in the fourth quarter," analyst Bill Pecoriello wrote in a research note Monday.

    Coca-Cola Co. did not immediately return a call for comment on the idea, which it had not mentioned previously.

    There were signs the two companies were negotiating their relationship as consumers grew skittish from economic uncertainty. For instance, Coca-Cola raised the prices it charges bottlers for concentrate, following a price hike earlier in the fall by the bottler, and Coke's chief financial officer stepped down from the bottler's board.

    The higher prices gave Coca-Cola an additional $100 million to spend on promotions in the quarter, Pecoriello told investors on Oct. 23.

    That same week, Coca-Cola Enterprises named a former Coca-Cola executive, John Hunter, to replace Coke CFO Gary Fayard, who had served on CCE's board since 2001. The fortunes of the two companies are closely linked.

    As far as strategic alternatives, Pecoriello had said late last month that Coke clearly did not want to buy Coca-Cola Enterprises. He said then that a key obstacle was the fact that "Coca-Cola Enterprises has to maximize value for its shareholders, and it might not be willing to give up parts of its U.S. territory and/or Europe," the analyst wrote.

    Shares of Coca-Cola rose 93 cents to $46.38 as the Dow rose 300 points on election day. The bottler's shares rose 52 cents, or 5.2 percent, to $10.43.

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    • trader,

      Did you mean 'hard' earned dollars or heard earned dollars?

      My spelin aint the bestes eather.

    • The real problems of CCE are not at the distribution or supply chain cost level. There is significant margin contribution before overhead costs wipe out the heard earned dollars generated at street level.

    • I think CCE is where they are at because:

      a. They overpaid for intangible assets (i.e., franchise rights). Eventually, this catches up. For explaination of this effect, see Goizueta. He said that an ROI below the cost of capital is equivalent to liquidating the company. CCE was in that state for a decade+.

      b. CCE chased unprofitable volume because KO rebates on overpriced syrup, rebates based on volume, were like a gun to its head.

      Now CCE has to return to the real business world. It has started writing off the overpriced intangibles. It likely has been paring uneconomical volume. BUT IT STILL HOLDS THE TERRITORIAL SALES AND DISTRIBUTION RIGHTS. If KO wants them, or part of them, then KO should buy them at the value it sold them to CCE (plus inflation). After all, they are related parties. The initial sale was fudged up, might as well unravel it properly.

    • That's what CCE was pushing for when the loved CE came out. Look at how well that worked out for them. What know one seems to see is that CCE does on get paid on sales! It gets paid on what it delivers, thus JB's "we are a distribution company" saying comes from. Some of you sound like you are not sure what volume means, the volume that KO cares about is CASES! CCE's sales staff has been poorly excuting for years becuase they hired the wrong people to lead the sales teams. Then they went to diversity and hired off the street. If KO was not worried about the selling ability of CCE's staff then why do they have Acosta and CCNA sales people walking the halls of the CCE facilities. So, it makes sense...spin off the distribution piece and take control of the sales piece...instead of taking over CCE just take control of the selling aspect. Pay CCE some type of delivery fee etc.. I am not sure how the particulars would work out, but it would like a PFG, sysco etc...

    • ccekotrader, re:

      >>>There literally hundreds of brands which are never handled by an employee of the company who owns the brand. <<<

      Tis true here for decades. KO owns the brand, CCE makes the product and distributes it. And yes, CCE paid, overpaid, for the rights which include sales responsibility.

      So, what of the question of sales responsibility and if this should be reassigned? Well, if one wants to hire a contract manufacturer/distributor, then one needs to pay cost plus for the service. Look at CCE's long term ROI. Nobody would invest to do the service CCE provides, for KO, at such poor returns. Therefore the model doesn't work for a new cost plus investor unless KO makes it economically sensible. It is obvious that KO liked the prior/current arrangement. They booked the margins, not the contract services provider responsible for sales.

      As CCE has just written down, hugely, the costs they invested to have distribution/bottling rights, it would be a sham for CCE to give up a portion of these rights without getting paid handsomely by the related party, KO, that sold these rights to it.

    • You're playing word games. It was a word game to call them "franchise rights", it's a word game to call them "distribution rights". Either way, its goodwill/intagibles/etc. on the balance sheet. In the end, the price paid has to enable an acceptable return on the investment. The 5 yr. average is 1.9%, obviously a sick joke on the shareholder.

      So now goodwill is written down. I guess we'll see if Pecoriello is right in predicting some sort of relationship between KO and CCE to spawn a "supply chain management" company. As CCE is already charged with 'supply management", it will be interesting to see 2 things if another entity is spawned:

      a. Is there economic value or just another financial engineering project by KO?

      b. Does CCE get proper compensation, by KO, for already holding, and investing mightily, in franchise rights/distribution rights that provided a 5 yr averaged ROI of 1.9%? I am particularly interested if the related party, KO, pays prices at today's value, severely written down the past 2 years, or the value that CCE sent to KO. If it is the latter, funny how KO arrives johnny on the spot after CCE writes stuff down.

      KO doesn't want sales execution. They want volume. There's a difference that means a whole heckuva lot to CCE shareholders. CCE needs 'volume' that provides economic value to CCE. That means customers that provide proper margins to boost ROI.

      If KO wants "sales execution", that continues to ignore what CCE brings to the party, you get another decade like the last one. The thing is, CCE can't afford such any longer. CCE is hollowed out, imo.

      However, KO shouldn't get "sales execution" rights without buying back the franchise/distribution rights CCE overpaid for the past 2 decades.

    • The point is you are stuck in the old franchise business model and the new world order is based on distribution agreements. Franchisee's are protected by federal regulations of all sorts which longer applies to CCE.

      The goodwill on the books was simply an accounting manuever to prop up the valuation versus the tangible assets. The goodwill has nothing to do with the franchise and has everything to do with the value of the brand.

      When you are paying $100,000,000 for a bottler territory and the tangible book assets are worth only $50,000,000 then the difference must be booked as goodwill.

      What KO wants more than anything is control over sales execution. KO has been very frustrated over the years with paying for programs and only gaining 50,60,70% execution.

      Look at virtually every other category in a grocery store besides beverages and there are plenty of business models which sales and marketing are brand entities and distribution is handled by 3PL.

      There literally hundreds of brands which are never handled by an employee of the company who owns the brand.

    • Franchise rights is what the balance sheet goodwill reflects as far as what I have read. If you want to call them "distribution rights", so be it. What's your point?

    • Distribution / Franchise agreements are worth what they're worth. CCE just wrote theirs down.

      Take a look at Bill Heard Chevrolet. 2 years ago those franchise agreements were worth a fortune and if GM had tried to reduce the number of Chevy dealers it would have had to pay plenty for them.

      Today, they're not worth the paper they are written on. Even in the financial woes GM's in they'll buy back those rights for next to nothing now since dealer reduction is part of their recovery plan. Better to purchase for nothing than have Heard sell the franchise rights in 2 or 3 years through a bankruptcy auction.

      CCE's in the same spot.The agreements aren't worth $3 a case in my mind, so why not trade them for something valuable.

      Funny though. I always thought CCE would stick with bottling and sales and outsource the capital intensive distribution. CCE could let that contract go every 5 years or so and mandate equipment efficiency and age and delivery standards.

      CCE as a distribution company? Sorry, way to in-efficient. Almost better to let Sysco Foods handle it.

    • Have you ever seen a distribution agreement ?

      They are no longer called franchise agreements.

      KO holds the power from top to bottom in the agreement and can withdraw or cancel at any time for just about any reason.

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