Coca-Cola Co will take control of the North American operations of its top bottler, Coca-Cola Enterprises Inc , in a strategic reversal that would close a competitive gap after a similar deal by PepsiCo.

The transaction includes about $3.2 billion in Coke's equity in CCE and the assumption of nearly $9 billion in debt. It will help the world's largest soft drinks company cut costs and increase flexibility in its distribution.

Coke's announcement on Thursday comes just as PepsiCo
is due to close the $7.8 billion purchase of its largest bottlers, Pepsi Bottling Group Inc
and PepsiAmericas Inc
.

Coke couldn't sit back while Pepsi delivered $600 million (or more) in synergies for reinvestment and then transformed its U.S. business model, said ConsumerEdge Research analyst Bill Pecoriello.

Pecoriello said the main question was whether Coke should keep the North American bottling operations for the long term, or eventually sell it to Coca-Cola Femsa , a venture with Mexico's FEMSA .

FEMSA has said recently that it was looking for acquisition opportunities in the soft-drink bottling industry after selling its beer unit to Heineken.

JP Morgan analyst John Faucher said the news was a surprise to investors. Coke Chief Executive Muhtar Kent has repeatedly said he was committed to the company's franchise model that kept bottling operations separate, even when asked directly about ramifications about Pepsi's deal.

Even those of us who thought this would happen eventually will be shocked by the timing, Faucher said.

CCE shares rose 34 percent to $25.63 in noon trading, while Coke's shares nearly 5 percent to $52.62, both on the New York Stock Exchange.

News of the deal also boosted shares in Dr Pepper Snapple Group by over 6 percent, as analysts expect it could receive a payout of up to $1 billion to allow Coca-Cola to continue distributing its drinks.

BIG PAYOUT TO CCE SHAREHOLDERS

In return for taking control of the North American business, Coke will relinquish its 34 percent stake in CCE, worth $3.2 billion based on Wednesday's closing price. It will also assume $8.88 billion in CCE debt.

Coke Enterprises will remain a publicly traded company focused on Europe, with assets in countries including France and Belgium. As part of the deal, it will buy Coke's bottling operations in Norway and Sweden, and have the right to buy the controlling interest in Coke's German bottling business.

CCE will make a one-time payment of $10 a share to its stockholders, who will also receive shares of the new Coke Enterprises.

Kent told CNBC television the two companies had held talks for more than a year about how to strategically transform the North American soft-drink business.

Our North American business structure has remained essentially the same since CCE was founded in 1986, while the market and industry have changed dramatically, Kent said in a statement.

Under that model, Coke sells beverage concentrate and CCE bottles and distributes the drinks. But the structure has at times been a source of tension over issues such as the price Coke charges for its concentrate.

CCE's North American business comprises about 75 percent of Coke's U.S. bottler-delivered sales volume and almost all of its Canadian bottler-delivered volume.

The companies agreed in principle that CCE would pay $822 million for Coke's bottling operations in Norway and Sweden, which together generate annual sales just north of $700 million. CCE will also have the right to acquire the soft-drink maker's 83 percent equity stake in its German bottling operations 18 months to 36 months after closing.

Coke, which will have no equity stake in the new Europe-focused CCE, expects the transactions to add to earnings by 2012. It also expects cost savings of $350 million over four years, with 70 percent of the savings realized by the end of 2012. It expects to take a related one-time charge of $425 million over three years, but will not need to use any additional borrowings.

Moody's Investors Service affirmed Coke's short- and long-term credit ratings, saying the deal will not materially change the financial metrics of the consolidated system.

CCE will keep its name and U.S. stock listing. It is expected to announce a $1 billion share buyback shortly after the deal closes, expected in the fourth quarter of 2010, and plans an initial annual dividend of 50 cents per share.

Allen & Co and Goldman Sachs were financial advisors to Coca-Cola. Skadden, Arps, Slate, Meagher & Flom provided legal counsel. For CCE, Credit Suisse and Lazard served as financial advisors and Cahill Gordon & Reindel provided legal counsel.

(Additional reporting by Jessica Hall in Philadelphia; Editing by Michele Gershberg, Maureen Bavdek, Tim Dobbyn)