• In May 2021, Coca Cola European Partners (CCEP) completed the A$9.8bn (US$7.2bn) acquisition of Coca Cola Amatil (CCA) to form Coca Cola Europacific Partners
• The size and complexity of the M&A transaction created unprecedented market exposures for the company
• Partnering with Deutsche Bank, CCEP chose to use Deal Contingent hedging, which required careful and precise collaboration

In 1919, Coca-Cola, the popular US drinks company, began bottling on European shores for the first time – founding two plants, in Paris and Bordeaux. The rest, as they say, is history. As sales of Coca-Cola went from strength to strength in Europe, so too did the production. By 2016, this success had led to the founding of Coca-Cola European Partners (CCEP) – the largest independent Coca-Cola bottler in the world based on revenue.

In May 2021, CCEP completed the large, transformative cross-border acquisition of Coca Cola Amatil (CCA), another independent bottling company that serves Australia, New Zealand, Indonesia, and several other Southeast Asian countries. The combined company, Coca Cola Europacific Partners, is one of the leading consumer goods companies in the world – and serves around 1.75 million customers across 29 countries.

The new expanded company was announced on 9 May 2021. ¹ In an interview published on the CCEP website the next day, CEO Damian Gammell observed, “Creating Coca-Cola Europacific Partners has only been possible because of the collective efforts of our 33,200 colleagues and the support of our customers, partners and suppliers.” ² This case study shares how a hedging deal, together with the resilience and determination of the CCEP treasury team and Deutsche Bank’s FX and interest rate teams played its part in the journey of what was formerly Coca Cola European Partners to the new Coca Cola Europacific Partners company.

The acquisition, worth A$9.8bn (US$7.2bn), was funded by long-term financing worth around €6bn, creating significant foreign-exchange (FX) and interest-rate exposures during a time of huge market volatility. In the face of the vast scale and complexity of this transaction – and factoring in a demanding timeline – the CCEP treasury team pulled out all the stops to hedge the associated risks in a comprehensive, conscientious and highly efficient way.

“Achieving certainty over the cost of the acquisition was the key benefit of this complex deal-contingent FX hedging exercise”

When it came to hedging the transaction, the first challenge was its size. With around €6bn needed to finance the acquisition, even small fluctuations in the EUR/AUD exchange rate or mid-swap rates (a rate that factors in the cost of the hedge itself) had the potential to significantly increase long-term costs. The scale of the transaction also necessitated a considerable amount of due diligence and consensus building over a short period of time.

Next came the complexity of the risk management. There were two different and significant types of risk to manage: market (FX and interest rate) risk and M&A completion risk. CCEP had never had to contend with these before and, as the landscape changed constantly, the challenge involved pricing the hedge (with only a handful of banks able to support a transaction of this size and type), dealing with noise in the market ahead of the transaction, timing the execution in a volatile market, and understanding the impact of different approaches on the company’s overall risk and profit and loss (P&L) positions.

The challenge was exacerbated by the need to align the risk management implementation with the key milestone and risk profile of the underlying acquisition. Before CCEP moved into the market for the bond that would finance the acquisition, the treasury team had to put hedges in place. This required a persuasive pitch to banks, explaining why the transaction was likely to go ahead, along with structuring hedges but without a clear idea of the maturity period – given that M&A timetables are not always predictable.

The acquisition itself also went through its own evolution, with the scheme price rising from A$9.28bn to A$9.8bn. This meant recalibrating all the associated hedges to ensure the full amount was properly covered – a job complicated by the fact that the banks had to increase their risk limits for what was already a huge transaction that needed completing in a tight window.

Against this backdrop of challenges and considerations – and following a thorough review of the different approaches available – the CCEP treasury team decided on deal-contingent hedging, which was a new form of hedging for the company as the primary means of managing the contingent market risks on an M&A transaction. CCEP chose to hedge the FX risk via a Deal Contingent FX Forward, and the interest rate risk via a Deal Contingent Interest Rate hedge. This required seamless collaboration with CCEP’s banking teams, with both sides needing to reach a shared understanding of the underlying transaction, the hedge and what would happen in various scenarios that might play out.

Choosing suitable bank counterparties was therefore one of the very first – and one of the most critical – decisions to get right. The counterparties needed to have not only the right capabilities, but also an experienced team that could leverage these capabilities to drive and steer the desired result.  For CCEP, Deutsche Bank ticked all the boxes – proving to be a trusted partner in helping manage the company’s M&A-driven, contingent currency and interest rate risks. 

It was also important to assemble the right internal team, drawing together expertise from the relevant parts of the company. The sheer number of hedging alternatives made this a considerable challenge, as the team involved needed to have a clear and thorough understanding of the wider implications of the transaction – from intricate accounting considerations to how the booking itself worked. Yet, with a strong inter-disciplinary team in place, all legal, tax or accounting issues were avoided and hedging costs minimised.   

Achieving certainty over the cost of the acquisition was the key benefit of this complex exercise. FX and interest rate changes made it highly uncertain at the start, but by planning and executing a comprehensive risk management strategy, the CCEP team was able to carry out discussions with the rating agency involved in the M&A process that were much more straightforward and productive. This certainty also meant that CCEP was able to raise the funding for the acquisition at a favourable rate of just 40 basis points over the mid-swap rate, with investors appreciating the security and clarity in the face of volatile markets. The icing on the cake was that the hedges finished in the money, which meant the treasury team was able to save on costs compared to the prevailing market rates at the time the transaction closed – in addition to cost-efficiencies generated by having certainty over the quantum of financing required when approaching investors/lenders.

Commenting on the new company’s H1 performance on 2 September, 2021, CEO Damian Gammell specifically referenced the integration of Coca-Amatil as a contributor to ongoing financial strength, “Top-line growth, operating margin improvement and stronger free cash flow generation demonstrate the strength of our business and the successful integration of Coca-Cola Amatil. We continue to be excited by this opportunity, being unlocked through the great collaboration and sharing across all our European markets and API.” ³ When he added, “I would also like to highlight the extraordinary efforts and high engagement of all our colleagues,” the work of the CCEP treasury team stood out as a particularly shining example of these synergies in action.

Sources

¹ See https://bit.ly/3hjVvyR at cocacolaep.com
² See https://bit.ly/2X4wTDv at cocacolaep.com
³ See https://bit.ly/3hkmkmo at cocacolaep.com