Coke bid for Quaker Oats: the day after

A day after news broke o
21 November 2000

While the company confirmed reports of the proposed takeover offer, it reiterated, in a move to pacify investors, that it would only consider the proposal seriously if the takeover plays a vital role in advancing its strategy of building a total non-alcoholic beverage company.

While the proposed takeover offer is reportedly being actively supported by most senior management of Coke, including Douglas Daft, chairman and chief executive officer, there is a strong feeling among investors and analysts that external directors, including the legendary value investor, Warren Buffet, will not support the move.

Further, the takeover offer may face opposition from competition regulators. US regulators may not be satisfied by a simple disposal of Coca Cola's own Powerade sports drink, Gatorade's closest competitor, with an 11 per cent share of the market. Coca Cola would have to find a strong buyer for Powerade to convince the regulators. Candidates would include Nestle, the Swiss food giant, or Cadbury-Schweppes, the UK confectionery and drinks group.

Analysts on Wall Street had differing views. Some were of the opinion that the Coke move signaled the company’s determination to prevent arch rival, PepsiCo, from getting its hands on the Quaker business. Some expressed their concern that Coke was taking on Quaker’s breakfast cereals and snacks businesses as part of the proposed deal. Coke would be stuck with this deal and not be able to dispose assets for two years, if it were to treat this transaction as a tax-free pooling of interests. Yet others believed that this move, at a time when the company had its hands full with restructuring, is a knee-jerk reaction to competition.

It is estimated that Coca Cola would be paying 25-30 times Gatorade's expected 2001 earnings before interest, tax, depreciation and amortisation. Gatorade is by far the leading sports drink in the US with a market share of 84 per cent.