Unconsolidated Equity Method Subsidiaries

 

 

 

 

 

 

 


Coca-Cola (Coke) [KO] is the largest soft drink firm in the world. However, it is not clear how many bottles or cans of soft drink it manufactures. Coke seems not to bottle and distribute most of its beverages; that activity is carried out by affiliates in which Coke has a equity interest. Coca-Cola Enterprises (Enterprises) [CCE] is the world’s largest marketer and distributor of Coke products. The relationship between the two firms is complex.
 

Review this relationship that is detailed in the 2001 10K's of  Coke and Enterprises.
They are very long - running into thousands of pages.  Please DO NOT print them.  The following information with respect to Coke's  ownership interest in its bottlers is useful
 

In the Coke 10K look at the sections
• Significant Equity Investments And Company Bottling Operations In Page 6
• Note 2: Bottling Investments
 

In the Enterprises 10K look at the sections
• 2001 Management’s Financial Review - Relationship With The Coca-Cola Company in page 20 of the 10K
• Note 16. Related Party Transactions


Required:

1a. Describe the relationship between Coke and Enterprises. 
1b. How inter-related are the two company's businesses?  Give operational and financial measures of the relationships. 
1c. What accounting method does Coke to use to account for its ownership in Enterprises? 
1d. What is its long-term strategy regarding bottling operations?
1e. Given the relationship between Coke and Enterprises, discuss the appropriateness of Coke’s use of the equity method to account for its investment in Enterprises.
1f. Look at the attached article "Things Aren't Going Better At Coke".  Why did Coke and the then chairman Roberto C. Goizueta spin off CCE?

2. Prepare a 2001 balance sheet, income statement, and cash flow statement for Coke, with Enterprises fully consolidated.

3. Compute the following ratios for Coke (as reported), Enterprises, and Coke after full consolidation of Enterprises :

(1) Current ratio (2) Return on sales (3) Gross margin (4) Return on Assets (5) Return on equity
(6) Times interest earned (7) Debt-to-equity (8) Inventory turnover (9) Receivable turnover

4. Discuss the differences in the ratios in part 3 between Coke as reported and after the consolidation of Enterprises.

5. Repeat parts 2 through 4, but using proportionate consolidation for Enterprises.

6. Coke’s 10-K "NOTE 2: BOTTLING INVESTMENTS" gives summary details about CCE and later in the note there is section called "Other Equity Investments" - other bottling affiliates (excluding Enterprises) accounted for using the equity method.  Discuss the expected effect of:
(1) Full consolidation of all "Other Equity Investments" on Coke’s financial statements.
(2) Proportionate consolidation of all "Other Equity Investments" on Coke’s financial statements.

Do not compute the consolidated ratios.  Discuss only • Current ratio •  Debt-to-equity •  Return on assets by computing the ratios for the "Other Equity Investments".

7. After the scandals of Enron etc., the FASB issued FIN 46 (FASB Interpretation No. 46) for Consolidation of Variable Interest Entities.  You can  refer to
 - the original statement
Fin-46-FASB and / or
 - a guidebook from PriceWaterhouseCoopers
Fin-46-PriceWaterhouseCoopers

They are long, but very important.  Try to read at least the summaries.   Based on Fin-46, how should Coke treat its investment in CCE.

8. Coke states “In line with our long-term bottling strategy, we consider alternatives for reducing our ownership interest in a bottler.” Discuss Coke’s motivation to reduce such ownership interests.

9. As a financial analyst, discuss the advantages and disadvantages of viewing Coke, with its bottling affiliates:
(1) On the equity method  (2) Proportionately consolidated  (3) Fully consolidated
 


The following readings trace the evolution of Coke's financical structure (Click for the article):
The Bottleneck At Coca-Cola Enterprisee 1992

Coke-Soda-Rebellion-2006
Things Aren't Going Better At Coke Aug 2004 BW
The Cost of Babying Bottlers 2002 
Price Rise At Coke Bottler Raises Questions About Control 2004

Gone Flat, Dec 2004
Coke 2004 10K report
Price Rise At Coke Bottler Raises Questions About Control, Oct 2004