Coca-Cola HBC (LSE:CCH) is one of the top-performing FTSE 100 stocks of the last 12 months. But one of its strongest brands is Costa, which the parent Coca-Cola company has been trying to divest.
Could that be a big problem for the bottling and distribution company? Or is there something else that investors need to pay attention to?
Costa
Coca-Cola HBC is the firm that manufactures and distributes Coca-Cola products in various countries. And it recently expanded its scope by buying 75% of its African bottling subsidiary.
One reason the firm has done well recently is the success of its Costa division, where sales have grown 27% in the last 12 months. That’s great, but the parent company hasn’t been having the same success.
The US company has been reporting losses in its Costa unit and has been looking to sell this off as a result. And while it didn’t find a private equity buyer in its most recent attempt, it may well try again.
Investors might therefore wonder whether Coca-Cola HBC might be about to lose the rights to one of its top-performing assets. But the situation is much more complicated than this.
Assets and ownership
There are two parts to Costa’s business. One is the physical cafes and the other operates vending machines and manufactures ready-to-drink products that are sold in supermarkets.
Coca-Cola is looking to find a buyer for the physical stores. But the bit that’s been performing well for Coca-Cola HBC is the ready-to-drink division, which the parent company is looking to retain.
Even if a sale does go through in the future, that means the FTSE 100 company should still be able to retain its fast-growing business. And that’s a structure that could benefit both parties.
A private equity firm is unlikely to be interested in building the distribution network that Coca-Cola HBC has. So the company might well be able to retain its key asset even without the cafes.
Capital intensity
Costa is a bit of an anomaly in the Coca-Cola system. The subsidiary owns the part of the business that’s less capital-intensive, which is the opposite of how it is with most of the other products.
Most of the time, the parent company owns the intellectual property and manufactures syrups. The bottling franchise does all the manufacturing, distribution – the stuff that takes heavy machinery.
That makes Coca-Cola HBC more vulnerable to inflation. Higher capital requirements mean there’s a risk that rising costs can make maintaining and replacing its assets more expensive over time.
With Costa, though, it’s the other way around. The capital-intensive bit is the stores – which the parent company owns – while the subsidiary owns a relatively efficient part of the business.
Is the stock a buy?
Coca-Cola HBC has some genuinely unique assets. And even if the parent company does eventually divest its interest in Costa, the bottling subsidiary should still keep its fast-growing asset.
The stock isn’t cheap at the moment and I think investors can find better value elsewhere. But it’s a business that shouldn’t be underestimated and is well worth keeping an eye on going forward.
