1987 - Year of the shrinking market?
Coca-Cola last month raised $1.18 billion in the second largest initial public offering in US history, of equity in its new bottling unit, Coca-Cola Enterprises.
This year, Coca-Cola paid $2.7 billion for some of the biggest bottlers in the US. By offering 51% of the shares in its new subsidiary, it is hoping to pay more than half of the $3 billion credit it set up with Citibank. That leaves $1.4 billion owing.
The subsidiary will be hoping to fund itself through long-term debt and commercial paper, according to Carlton Curtis, an assistant vice president at Coca-Cola. The subsidiary's target will be 50% debt to total capitalisation. The parent's debt load is only 25%.
Whether the subsidiary's equity was a good bargain the investors seemed to doubt. Issued at $16.50 each, the shares went down to $15.50 the next day. Not only is the subsidiary's debt load higher than the parent's; a bottler's pre-tax profit margin is usually 10%, whereas Coca-Cola's own margin is 16%.
The parent's debt financing has not been done in the US since 1980.