Coca-Cola's mixed message draws critics

Now Coke, a company long known for managing its message very carefully, is taking heat from some who think it said one thing while doing another.

"There’s no question (the CCE deal) flies in the face of what they’ve said in the past," said Morningstar analyst Phil Gorham. "This acquisition is absolutely an about-face. Does that call their credibility into question? I think so. I think investors will think twice from now on when they’re told something from Coke."

Credibility with analysts and trade journals is important to companies, as it helps them get shareholders and employees to believe in plans and support strategies.

Some who follow the company see no issue. Bill Pecoriello, CEO of Consumer Edge Research, said the company had hinted that changes in its distribution system could be coming. CEO Muhtar Kent spoke in November about the need for Coca-Cola's North American bottling system to evolve, he noted, even while endorsing the franchise bottler network.

"To take that to mean that, in the United States, things wouldn't change, I didn't hear that," said Pecoriello. "I never heard them say they would absolutely not do this. The risk is delaying action."

Several corporate governance experts say Coca-Cola was well within its rights to express support for the franchise system generally even while negotiating to buy its biggest franchise bottler.

Companies are required to disclose "material" information that investors need to make informed decisions, but they are prohibited from releasing information that would manipulate stock prices. Executives negotiating deals cannot categorically deny that they might do a deal; nor can they publicly mention their negotiations. Such leaks of inside information could expose a company to lawsuits from shareholders who lost money when the stock market reacted to executives' pronouncements.

"Part of this is the artful use of words," said Paul Lapides, director of the Corporate Governance Center at Kennesaw State University.

“Shareholders would really like to know everything that management is thinking about, but that’s just bad business,” he said, adding there is no requirement for companies to disclose negotiations until they reach an agreement to buy and sell at a certain price, subject to due diligence. "From a disclosure point of view, these guys did just fine."

How much to tell shareholders about potential acquisitions is a tricky question, said Charles Elson, director of the University of Delaware's John L. Weinberg Center for Corporate Governance. "There's not an easy answer, because the deal could always fall apart," he said. "You've got to get ‘material' information to investors as soon as possible, but what is ‘material'? Lots of things fall apart."

Coca-Cola maintains the CCE deal is more about streamlining its domestic bottling operations than a complete shift in strategy. The company has told investors in private meetings that, despite the looming takeover of CCE's operations, it remains supportive of the franchise system and wants to get out of the bottling business in the long-term. Analysts who've heard the briefings say Coke views the takeover as an intermediate step that will enable it to reshape bottling to cope with an era of reduced soda sales.

However, Coca-Cola has provided few details about its end game or its schedule after closing the deal with CCE. The company declined to comment on Wall Street's reaction.

Coke started hearing questions about the future of its bottling network last spring, after archrival PepsiCo announced plans to buy its two biggest bottlers. Both beverage giants face a slide in North American soda sales, and taking control of bottlers could cut costs and give them more ability to adjust distribution of new and existing drinks.

"Fundamentally, we believe the franchise model is the best way to win in the marketplace," Kent said in April 2009.

Chief financial officer Gary Fayard reiterated that in June: "We think there are different ways to win in the marketplace. The constructive tension between the company and the bottlers actually leads to better results."

And in November, Kent told analysts in Atlanta that the franchise model is "the most magnificent fusion of scalable, global brands." He repeated Coca-Cola's commitment to the business model in New York in December.

J.P. Morgan analyst John Faucher said such comments made it tough to predict that a deal with CCE would happen so soon. "Coke probably knew this," he said, "but it was in their best interest for the investment community to not expect the deal."

Gerry Khermouch, editor of Beverage Business Insights, noted that by Coke's own account the deal had been in the works for perhaps a year and a half. He said he was "stunned" when executives insisted they had not changed their tune. "Were they, or were they not basically misleading people about their intentions with CCE?" he asked. "The answer to that, I think, was yes."

But some observers say the company did well to avoid wasting its shareholder's money by letting rumors drive up CCE's price.

Kent "had to be circumspect about what he said" while negotiations were ongoing, said John Sicher, editor of Beverage Digest and a former corporate attorney who specialized in mergers and acquisitions. "He couldn't say too little or too much. His ‘committed to the franchise system' message was accurate and an appropriate communication."

Even Morningstar's Gorham, who thinks the episode damaged Coke's credibility, said the statements probably saved Coca-Cola shareholders money by keeping CCE's stock price from flying higher on talk of a deal.

"If it involves telling a little white lie for a few months while negotiations are going on," said Gorham, "that’s probably the best way to go about it."