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Coca-Cola agrees to Dr Pepper firewall in bottler deal

By Guy Montague-Jones , 28-Sep-2010

The Coca-Cola Company has agreed to set up a firewall to protect the interests of Dr Pepper Snapple as a condition for its $12.3bn acquisition of the North American arm of the bottler Coca-Cola Enterprises (CCE).

The company had twice withdrawn and refiled its notification with the Federal Trade Commission (FTC) for the deal, putting in its latest application at the end of August.

Firewall

The FTC has now given the green light to the proposed acquisition so long as Coca-Cola agrees to set up a firewall to protect the interests of Dr Pepper Snapple, which is a customer of CEE. The bottler recently signed a 20-year deal worth $715m to continue to bottle and distribute Dr Pepper branded products and those of Canada Dry.

The issue arises from the fact that Dr Pepper Snapple provides commercially sensitive information about its marketing plans to its bottling partners. If that bottler happens to be its direct competitor – in this case Coca-Cola - that could create a conflict of interest.

PepsiCo parallel

The purpose of setting up firewall is therefore to ensure that Coca-Cola employees in a position to use information about Dr Pepper against the company are not able to do so.

The FTC imposed a similar condition on PepsiCo when it approved its $7.8bn acquisition of its two largest bottlers and distributors. Again the firewall was created to resolve a potential conflict of interest arising from Dr Pepper being a customer of the PepsiCo bottlers.

Returning to the Coca-Cola deal, FTC approval means that the only remaining hurdle to completing the acquisition is the approval of CCE shareholders, who are due to vote on 1 October.

If the shareholders agree to the deal, the North American operations of CEE will become known as Coca-Cola Refreshments USA.

By acquiring CEE in North American, Coca-Cola hopes to be able to respond better to changing consumer preferences and get products to market quicker. It is also expected that the company will be able to cut away excess layers of management in sales and marketing. Over four years, the soft drinks maker said it expects to generate operational savings of $350m.

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