Coca-Cola Expands in Saudi Arabia

Following the massive investment plans in India during mid-November, The Coca-Cola Company ( KO - Analyst Report ) is now all set to further expand its footprint in the Middle East with the 50% acquisition of Aujan Industries. As one of the leading independent beverage sellers in Saudi Arabia, Aujan Industries stands among the leaders in still beverages in the countries it operates.

Coca-Cola has finalized the deal at $980 million, making the biggest-ever investment in the consumer goods sector in the Middle East. Further, the company expects to consummate the deal by the first half of 2012.

Under the terms of the deal, the world’s largest beverage maker Coca-Cola will own 50% of Aujan-owned brands and 49% of Aujan’s bottling and distribution company. However, the deal will exclude Aujan’s Iranian manufacturing and distribution businesses.

Coca-Cola is taking keen interest in the emerging markets, as the developed markets have minimal growth prospects. Besides the Middle East, Coca-Cola eyes the growing markets of India and has already invested over $1 billion in the last 18 years and still remains very optimistic about its Indian operations. In November, Coca-Cola, along with its bottling partners, planned to invest $2 billion in India starting from 2012 in its consumer marketing, infrastructure and brand-building segments.

As part of an ongoing push into emerging markets, Coca-Cola had also planned in September 2011 to invest $3 billion in Russia over the next five years, along with its Coca-Cola Hellenic Bottling Company. In August 2011, Coca-Cola also decided to invest $4 billion in China to expand in its fast-growing consumer market.

Its peer company PepsiCo Inc. ( ( PEP - Analyst Report ) ) also invested $500 million in India in 2008 and expects to triple its revenues over the next five years. Another competitor Kraft Foods, Inc. ( ( ) ) has increased its investment stake in India by over 70%, post its Cadbury acquisition, in the areas of research, advertising, selling and merchandising.

Earlier in October, Coca-Cola had planned to spend $5 billion in the Middle East and North Africa over the next 10 years. With the Saudi Arabian acquisition of Coca-Cola, the company will benefit from Aujan’s capability to run a well-positioned company and strengthen its leadership team.

Besides, Coca-Cola has the opportunity to explore and revitalize sales in the Middle East where Non Alcoholic Ready To Drink beverages are consumed at a high rate. Coca-Cola’s workforce of above 40,000 throughout the Middle East will also be helpful.

In addition, Aujan will be able to develop its manufacturing capacity, besides building its brands like Rani and Barbican globally, with the international presence of Coca-Cola.

Coca-Cola also reported strong operating earnings of $1.03 per share in third-quarter 2011 in October that came ahead of the Zacks Consensus Estimate by a penny, and rose 12% from the year-ago quarter. The results were encouraged by strong growth outside the U.S. and in emerging markets.

Coca-Cola also sold more drinks in each region during the quarter and continued to gain market share in North America from its peer, PepsiCo.

Further, Coca-Cola's acquisition of Coca-Cola Enterprises Inc. ( CCE - Analyst Report ) ’s North American bottling operations not only led to its expansion, but also helped it reap benefits from the manufacturing and distribution efficiencies in the U.S.

Furthermore, we believe that Coca-Cola has the capacity to overcome the effects of recession and sustain market share in the future. The Coca-Cola brand had a market share of about 17% in the U.S. in 2010, much higher than its primary competitor PepsiCo, which had less than 11%.

Coca-Cola currently holds a Zacks #3 Rank, which translates into a short-term Hold rating. On a long-term basis, we maintain a Neutral rating on the stock.