Citing its concern about possible conflicts of interest at The Coca-Cola
Company (NYSE:KO) amid media speculation that 3G Capital and Berkshire
Hathaway may be planning a transaction to take Coca-Cola private,
Wintergreen Advisers today released the following letter. It is
addressed to the independent directors who chair Coca-Cola’s Audit,
Compensation, and Governance Committees and urges them to address these
conflicts and take steps to exercise their fiduciary duty with regard
for all shareholders.
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Committee Chairs of the Board of Directors
The Coca-Cola Company
One Coca-Cola Plaza
Atlanta, GA
30313
June 16, 2014
Dear Ms. Lagomasino and Messrs. Greenberg and Nunn:
Events over the past few months, leading up to and after the annual
meeting of Coca-Cola shareholders, have given rise to grave concerns at
Wintergreen Advisers regarding potential conflicts of interests at
Coca-Cola. I am writing to you, in your roles as chairs of the
Compensation, Audit, and Governance Committees, respectively, to urge
you and your fellow Board members to address the current and potential
conflicts that we identify below.
Wintergreen’s specific and most recent concern stems from speculation in
the U.S. and Brazilian media that Berkshire Hathaway, your largest
shareholder, and 3G Capital, a private equity firm, may be planning a
transaction to take Coca-Cola private.1 Media reports express
the view that Berkshire's and 3G's recent joint acquisition of Heinz may
serve as the blueprint for such a transaction. Additionally, Warren
Buffett has stated that the Heinz deal “created a partnership template
that may be used by Berkshire in future acquisitions of size”2
and stated at Berkshire’s 2014 shareholders meeting that "we haven’t
bought Coca-Cola, yet.”
As you may recall, the Heinz deal took place quickly, in part because
there was no “go-shop” period in which Heinz could solicit competing
offers and potentially increase the purchase price. In addition, Heinz
agreed to a $750 million termination fee, which is about three times
greater than if there had been a typical go-shop provision.3
All of this combined to make the deal “unusual” and the Heinz Board
subsequently negotiated only with Berkshire and 3G.4 As
adviser to longtime shareholders of Coca-Cola, we are concerned that a
similar type of sweetheart, insider deal for Coca-Cola could, in our
opinion, significantly undervalue Coca-Cola and irreparably harm
Coca-Cola shareholders. Since Berkshire is Coca-Cola's largest
shareholder, owning greater than 9% of the outstanding shares, and
Warren Buffett's son Howard serves as a Director of both Coca-Cola and
Berkshire Hathaway, we believe our concerns are valid.
None of Coca-Cola, Berkshire or 3G has publicly commented on the
accuracy of these media reports. However, the possibility of a
Berkshire-3G bid puts both Warren Buffett's curious silence and
subsequent abstention regarding the Coca-Cola 2014 Equity Plan that he
thought was "quite excessive" and the Coca-Cola Board’s machinations to
win shareholder approval of the excessive Plan, seemingly at any cost,
in a worrisome context.
Under the Plan, a buyout could trigger a change-of-control provision,
immediately vesting equity awards granted to Coca-Cola’s top management
and its Board members. In addition, the Plan removed a 5% cap on awards
to any individual, potentially allowing Coca-Cola to front-load awards.
As a result of these provisions, stock and options worth hundreds of
millions of dollars at today's share price that would otherwise be paid
out over a period of several years could vest overnight. If such a deal
were completed today, Coca-Cola Chairman and CEO Muhtar Kent alone would
stand to reap a nine-figure pay day. Coca-Cola's and Berkshire's failure
to meaningfully address concerns regarding the Plan and the way it was
adopted raise significant questions about whether passing the Plan was a
pay off for Mr. Kent's acquiescence in going along with a future
acquisition of Coca-Cola.
Regardless of whether the Coca-Cola Board considers this accelerated
vesting a feature or an oversight of the Plan, we are concerned that it
incentivizes the Board and Mr. Kent to sell Coca-Cola, regardless of the
price. In addition, in a "going-private" transaction, the buyers (here,
potentially Berkshire and 3G) seek to pay the lowest possible price for
the target company, whereas it is in the best interests of the
shareholders to receive the highest premium possible. We remind the
Coca-Cola Board members that in a potential buyout situation, they have
a fiduciary duty to shareholders to obtain the highest price reasonably
available, regardless of whether they have competing personal interests.
In our opinion, any proposed transaction should be reviewed and priced
by an independent committee of the Coca-Cola Board with the assistance
of respected outside counsel and advisers. At a minimum, we believe
there should be a go-shop period in which Coca-Cola solicits multiple
bids and creates a truly competitive process in order to obtain the
highest reasonable price for shareholders. Given the extent of the
potential conflicts of interest and the events over the past few months,
we expect nothing less.
In addition, the Coca-Cola Board should consider heading off a potential
bid by undertaking an immediate restructuring plan of its own under a
new management team. We believe there is a great deal of additional
value within Coca-Cola that a new management team could quickly unlock
by running Coca-Cola more efficiently and on behalf of its true owners,
the shareholders. We are concerned by current management’s recent track
record of acquiring short-term growth at lofty valuations, such as the
recent Keurig Green Mountain Inc. acquisition, rather than focusing on
long-term growth and profitability at Coca-Cola’s core brands and
products. Additional such deals will only dilute the enormous value of
Coca-Cola’s existing brands and distract management from the task of
restoring Coca-Cola to organic growth.
Since Coca-Cola filed its 2014 Proxy Statement and subsequently muscled
through the controversial Equity Plan, there are now more questions than
answers. It increasingly appears to us that there are substantial
conflicts of interests, extensive governance issues and perhaps plans to
take Coca-Cola private. This is extremely troubling and is exacerbated
by Coca-Cola's failure to address these legitimate concerns. The
shareholders deserve prompt and complete answers.
Regards,
David J. Winters, CEO
Wintergreen Advisers, LLC
973-263-4500
Cc: Board of Directors
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1 Fortune, "Warren Buffett, activist investor?" by Jen
Wieczner, May 3, 2014. Istoe Dinheiro, "A próxima cortada de Buffett,"
By Cláudio Gradilone & Carlos Eduardo Valim, May 9, 2014. (With English
translation). Full articles available at http://fortune.com/2014/05/03/warren-buffett-activist-investor/
and http://www.istoedinheiro.com.br/noticias/negocios/20140509/proxima-cortada-buffett/153158.shtml
2 2013 Berkshire Hathaway Annual Report, page 3
3 The New York Times, “Buffett’s Kind of Deal” by Steven
Davidoff, Feb 15, 2013. Full article available at http://dealbook.nytimes.com/2013/02/15/warren-buffetts-kind-of-deal/?_php=true&_type=blogs&_r=0
4 HJ Heinz proxy statement, March 27, 2013, pages 37-49
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