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Coca-Cola (KO) to Divest Bottling Assets in China for $852M

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The Coca-Cola Company (KO - Free Report) entered into an agreement to divest its bottling assets in China for 5.87 billion yuan ($852 million), as part of its refranchising strategy to focus more on its core strengths of building great brands and leading a strong, global franchise system.

The agreement has been signed between Coca-Cola and its three main bottling groups in China: Coca-Cola Bottling Investments Group China (“BIG”), COFCO Coca-Cola Beverages Limited (a subsidiary of COFCO Corporation, “COFCO”) and Swire Beverages Holdings Limited (“Swire”).

Per the deal, COFCO, Swire will buy the entire bottling territory owned in China by Coca-Cola’s BIG. The cola giant currently owns approximately a third of its bottling in China, with the balance split roughly between Swire and China Foods Ltd., which is part of state-owned COFCO Ltd.

Post the completion of the deal, COFCO will own and operate 18 bottling plants while Swire will own and manage 17 in Mainland China. However, the divestment agreement in China is subject to regulatory approvals.

Coca-Cola is refranchising the majority of its company-owned North American bottling territories to its existing as well as new bottlers to create a more efficient system. Additionally, in many international markets, Coca-Cola has been divesting and merging many bottling operations since 2014 to revamp its bottling system and thereby improve margins and drive growth.

China represents Coca-Cola’s third-largest market by volume and boasts a major long-term growth opportunity for the company and its bottling system. The Coca-Cola system in China is currently investing $4 billion locally for growth in the 2015 to 2017 period.

Meanwhile, Coca-Cola recently reported better-than-expected results in the third quarter helped by higher prices for sodas and strong demand for water and sports drinks in North America. The company has also witnessed improved margins on higher pricing and smaller packaging in developed markets amid slowing sales.

However, severe macroeconomic challenges in many international markets and the stronger U.S. dollar have impacted quarterly results for the cola giant, which generates about half its sales abroad. Acquisitions, divestitures, and structural items have also dented quarterly revenues by 8%.

The refranchising efforts, though hurting sales/profits in the near term, will result in higher operating margins, lower capital spending, and improved return on invested capital over the long term. Recently, Coca-Cola European Partners plc or CCEP (CCE - Free Report) reported better-than-expected results in the third quarter of 2016.

The company carries a Zacks Rank #3 (Hold).

Key Picks

Better-ranked beverage stocks include Embotelladora Andina S.A. AKO-B and Coca-Cola Amatil Ltd. (CCLAY - Free Report) .

Embotelladora is expected to witness a 44.4% rise in fourth-quarter earnings. The company sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

For Coca-Cola Amatil, full-year 2016 earnings growth is expected at 10.8% and the stock carries a Zanks Rank #2 (Buy).

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