Acquisitions and Divestitures |
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| Acquisition and Divestitures [Text Block] |
ACQUISITIONS AND DIVESTITURES
Acquisitions
During the three months ended March 30, 2018, our Company's acquisitions of businesses, equity method investments and nonmarketable securities totaled $183 million, which primarily related to the acquisition of additional interests in the Company’s franchise bottlers in the United Arab Emirates and in Oman, both of which were previously equity method investees of the Company. As a result of the additional interest acquired in the Oman bottler, we obtained a controlling interest, resulting in its consolidation.
During the three months ended March 31, 2017, our Company's acquisitions of businesses, equity method investments and nonmarketable securities totaled $337 million, which primarily related to the acquisition of AdeS, a plant-based beverage business, by the Company and several of its bottling partners in Latin America.
Divestitures
During the three months ended March 30, 2018, proceeds from disposals of businesses, equity method investments and nonmarketable securities totaled $3 million related to the proceeds from the refranchising of our U.S. Virgin Islands bottling territories.
During the three months ended March 31, 2017, proceeds from disposals of businesses, equity method investments and nonmarketable securities totaled $1,430 million, primarily related to proceeds from the refranchising of certain of our bottling territories in North America and an advance payment received of $703 million related to the portion of the China bottling operations that were refranchised in June 2017.
North America Refranchising
In conjunction with implementing a new beverage partnership model in North America, the Company refranchised bottling
territories that were previously managed by Coca-Cola Refreshments ("CCR") to certain of our unconsolidated bottling partners. These territories generally border these bottlers' existing territories, allowing each bottler to better service local customers and provide more efficient execution. By entering into comprehensive beverage agreements ("CBAs") with each of the bottlers, we granted certain exclusive territory rights for the distribution, promotion, marketing and sale of Company-owned and licensed beverage products as defined by the CBA.
Each CBA generally has a term of 10 years and is renewable, in most cases by the bottler and in some cases by the Company,
indefinitely for successive additional terms of 10 years each. Under the CBA, except for the CBA entered into in conjunction
with the refranchising of CCR's former Southwest operating unit ("Southwest Transaction") and for additional territories sold to AC Bebidas, S. de R.L. de C.V. ("AC Bebidas"), the bottlers make ongoing quarterly payments to the Company based on their gross profit in the refranchised territories throughout the term of the CBA, including renewals, in exchange for the grant of the exclusive territory rights. Liberty Coca-Cola Beverages, the co-owners of which are former management of CCR, will make ongoing quarterly payments based on the gross profit in its refranchised territories upon the earlier of reaching a predefined level of profitability, or the 41st quarter following the closing date.
Contemporaneously with the grant of these rights, the Company sold the distribution assets, certain working capital items, and
the exclusive rights to distribute certain beverage brands not owned by the Company, but distributed by CCR, in each of these
territories, excluding the territory included in the Southwest Transaction, to the respective bottlers in exchange for cash.
During the three months ended March 30, 2018 and March 31, 2017, cash proceeds from these sales totaled $3 million and $726 million, respectively. Included in the cash proceeds for the three months ended March 31, 2017, was $139 million from Coca-Cola Bottling Co. Consolidated ("CCBCC"), an equity method investee.
Under the applicable accounting guidance, we were required to derecognize all of the tangible assets sold as well as the
intangible assets transferred, including distribution rights, customer relationships and an allocated portion of goodwill related to
these territories. We recognized losses of $2 million and $497 million during the three months ended March 30, 2018 and March 31, 2017, respectively. These losses primarily related to the derecognition of the intangible assets transferred or reclassified as held for sale and were included in the line item other income (loss) — net in our condensed consolidated statements of income. See further discussion of assets and liabilities held for sale below. In total, we expect to recover the value of the intangible assets transferred to the bottlers under the CBAs through the future quarterly payments; however, as the payments for the territory rights are dependent on the bottlers' future gross profit in these territories, they are considered a form of contingent consideration.
There is diversity in practice as it relates to the accounting for contingent consideration by the seller. The seller can account for
the future contingent payments received as a gain contingency, recognizing the amounts in the statement of income only after the related contingencies are resolved and the gain is realized, which in this arrangement will be quarterly as the bottlers earn gross profit in the transferred territories. Alternatively, the seller can record a receivable for the contingent consideration at fair value on the date of sale and record any future differences between the payments received and this receivable in the statement of income as they occur. We elected the gain contingency treatment since the quarterly payments will be received throughout the terms of the CBAs, including all subsequent renewals, regardless of the cumulative amount received as compared to the value of the intangible assets transferred.
During the three months ended March 30, 2018 and March 31, 2017, the Company recorded charges of $19 million and $106 million, respectively, primarily related to payments made to certain of our unconsolidated bottling partners in order to convert the bottling agreements for their legacy territories and any previously refranchised territories to a single form of CBA with additional requirements. The additional requirements generally include a binding national governance model, mandatory
incidence pricing and additional core performance requirements, among other things. As a result of these conversions, the
legacy territories and any previously refranchised territories for each of the related bottling partners will be governed under
similar CBAs, which will provide consistency across each such bottler's respective territory, and consistency with other U.S.
bottlers that have been granted or converted to this form of CBA. The losses related to these payments were included in the line item other income (loss) — net in our condensed consolidated statements of income during the three months ended March 30, 2018 and March 31, 2017.
Refer to Note 16 for the impact these items had on our operating segments.
Assets and Liabilities Held for Sale
As of March 30, 2018, the Company had certain bottling operations in Latin America that met the criteria to be classified as held for sale, which requires us to present the related assets and liabilities as separate line items in our condensed consolidated balance sheet. We were not required to record these assets and liabilities at fair value less any costs to sell because their fair value approximates their carrying value. These operations were refranchised in April 2018.
The following table presents information related to the major classes of assets and liabilities that were classified as held for sale in our condensed consolidated balance sheets (in millions):
1 Consists of total assets relating to refranchising of Latin America bottling operations of $213 million, which are included in the Bottling Investments operating segment.
2 Consists of total liabilities relating to refranchising of Latin America bottling operations of $33 million, which are included in the Bottling Investments operating segment.
We determined that the operations included in the table above did not meet the criteria to be classified as discontinued operations under the applicable guidance.
Discontinued Operations
In October 2017, the Company and Anheuser-Busch InBev ("ABI") completed the transition of ABI's controlling interest in Coca-Cola Beverages Africa Proprietary Limited ("CCBA") to the Company for $3,150 million. We plan to hold our controlling interest in CCBA temporarily and are currently in discussions with several potential buyers and anticipate divesting of this interest in 2018. Accordingly, we have presented the financial position and results of operations of CCBA as discontinued operations in the accompanying condensed consolidated financial statements. We were not required to record these assets and liabilities at fair value less any costs to sell because their fair value approximates their carrying value.
The preliminary goodwill recorded at the time of the transaction was $4,262 million, none of which is tax deductible. This goodwill is in part due to the significant synergies that are expected from the consolidation of the bottling system in Southern and East Africa, especially within the country of South Africa. The initial accounting for the business combination is currently incomplete, although preliminary purchase accounting entries have been recorded, including a preliminary allocation of goodwill between CCBA and the reporting units expected to benefit from this transaction. The balance sheet line items that are expected to be impacted by the completion of purchase accounting are assets held for sale — discontinued operations and liabilities held for sale — discontinued operations in the condensed consolidated financial statements.
The following table presents information related to the major classes of assets and liabilities of CCBA that were classified as held for sale — discontinued operations in our condensed consolidated balance sheets (in millions):
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