VBL may Drink Up Pep­siCo’s Bot­tling Ops

RJ Corp-owned co in talks for south and west units to get na­tion­wide con­trol of these func­tions

The Economic Times - - Front Page - [email protected] times­group.com

New Delhi: RJ Corp-owned Varun Bev­er­ages Ltd (VBL) is in ad­vanced talks to ac­quire Pep­siCo’s bot­tling, sales and dis­tri­bu­tion in the south and west for its car­bon­ated drinks busi­ness, giv­ing it na­tion­wide con­trol of these func­tions, said two ex­ec­u­tives aware of the de­vel­op­ment. Varun al­ready runs Pep­siCo’s bot­tling op­er­a­tions in the north and east and con­trib­utes more than 51% to its In­dia’s sales vol­ume.

In De­cem­ber last year, Pep­siCo formed a team un­der chief hu­man re­sources of­fi­cer Su­chi­tra Ra­jen­dra to man­age the likely tran­si­tion of em­ploy­ees from com­pany-owned to fran­chisee-owned op­er­a­tions.

“The divest­ment of the bot­tling op­er­a­tions na­tion­ally is in line with the com­pany’s global di­rec­tion to run as­set-light busi­nesses across world mar­kets and op­er­ate the ma­jor­ity of its bot­tling op­er­a­tions through fran­chisee part­ners,” said one of the per­sons. “The likely trans­ac­tion, how­ever, will not be (com­pleted) in the short term since it will in­volve mul­ti­ple and com­pli­cated trans­fers of as­sets and em­ploy­ees.”

Once the divest­ment takes place, sales RJ Corp’s rev­enue: Pizza Hut, $1.6 bil­lion-plus KFC, Costa Cof­fee fran­chisees Varun Bev­er­ages

Listed on BSE in Nov 2016

Bought

Pep­siCo’s bot­tling busi­ness in north and east in 2014 and dis­tri­bu­tion will be op­er­ated by the fran­chisee part­ners. Pep­siCo will con­tinue to own the brand name and sell con­cen­trate to fran­chisees be­sides han­dling mar­ket­ing.

Pep­siCo said it wouldn’t com­ment on “ru­mours and spec­u­la­tion”. RJ Corp chair­man Ravi Jaipuria said the same: “We don’t com­ment on mar­ket spec­u­la­tion.” The $1.6-bil­lion di­ver­si­fied RJ Corp is among the Pur­chase, New York-based com­pany’s top three bot­tlers glob­ally.

The maker of Pepsi Cola, Moun­tain Dew lemon drink, Trop­i­cana juices and Lay’s chips and RJ Corp have been in talks over such a deal for close to two years. ET had re­ported in Oc­to­ber 2017 that Pep­siCo was look­ing to di­vest its bot­tling op­er­a­tions in the south and west as well.

Pep­siCo

Pepsi Cola, Moun­tain Dew lemon drink, Trop­i­cana juices, Lay’s chips

Plants owned in south & west

It has grounded planes, laid off staff and trimmed un­vi­able flights to stay afloat.

Jet has been coax­ing Eti­had for a fund in­jec­tion but the Abu Dhabi-based car­rier, like all in­vestors Goyal has ap­proached, has de­manded that he give up his ma­jor­ity stake and man­age­ment con­trol. To be sure, in such a sce­nario, Eti­had will have to rope in a new In­dian part­ner as a for­eign air­line can’t man­age a lo­cal car­rier, ac­cord­ing to cur­rent norms. Goyal hasn’t yet agreed to the pro­posed ar­range­ment, said the peo­ple cited above. Talks with the Tata Group for a res­cue also seem to have gone nowhere.

Shares are key col­lat­eral for air­lines, which have a lim­ited num­ber of as­sets, apart from the planes they own. Of the 120 or so planes in its fleet, Jet owns just 16 and is try­ing to sell a large chunk of them un­der a sale-and-lease­back ar­range­ment. Un­der this, planes are sold at a premium to their orig­i­nal pur­chase price and leased back through monthly rentals. Jet’s net worth and mar­ket cap have eroded due to its run of losses and fi­nan­cial trou­bles. The share price has de­clined 70% in the past 12 months and closed at ₹ 253 on Fri­day, up 4.67% from the day be­fore, on the BSE for a mar­ket value of ₹ 2,880 crore. Jet’s net worth at the end of Septem­ber was a neg­a­tive ₹ 9,768 crore with ac­cu­mu­lated losses at more than ₹ 13,000 crore.

BANKS’ RE­LUC­TANCE

In­dian banks, still nurs­ing the wounds of the Vi­jay Mallya-founded King­fisher Air­lines’ de­fault, are re­luc­tant to throw Jet a life­line with­out cov­er­ing their ex­po­sure with ad­e­quate col­lat­eral. The banks say Mallya, cur­rently fight­ing ex­tra­di­tion in the UK and fac­ing fraud and money- laun­der­ing charges, owes them Rs 9,000 crore.

“If things don’t work out, we fear Jet will go the King­fisher way. We have also asked Eti­had that, given its fi­nan­cial po­si­tion, whether it would be able to chip in with cap­i­tal,” a se­nior banker told ET.

Eti­had will be cau­tious with its air­line in­vest­ments, given that those it has made in Europe, such as Air Ber­lin and Al­i­talia, have soured and af­fected its own fi­nan­cial health. The air­line posted a loss of $1.52 bil­lion in 2017 com­pared witha $1.87 bil­lion loss in 2016. The air­line hasn’t de­clared its earn­ings for 2018 yet but Fitch Rat­ings has es­ti­mated it will be in the red till 2022. Last week, the air­line can­celled an or­der for 10 Air­bus A320­neo planes for Air Ser­bia, in which it owns a 49% stake. Eti­had has long been ru­moured to be merg­ing with big­ger, more prof­itable Dubai-based ri­val Emi­rates.

Jet has to­tal debt of over ₹ 8,000 crore and, ac­cord­ing to es­ti­mates by ICRA, its loan re­pay­ments till FY21 to­tal Rs 6,312 crore. The con­sor­tium of In­dian lenders led by State Bank of In­dia (SBI) has also not yet agreed to a pro­posal to con­vert debt to eq­uity in Jet. The lenders have been meet­ing ev­ery week, try­ing to stitch to­gether a bailout plan for Jet. Goyal has mean­while met gov­ern­ment of­fi­cials at the high­est level, ap­peal­ing for as­sis­tance to save his air­line.

Jet had in 2013 raised loans of $300 mil­lion from HSBC and a con­sor­tium of banks headed by Mashreq. Eti­had had backed the loans after it bought about a quar­ter of Jet for $379 mil­lion. How­ever, last Septem­ber, Mashreq and a few other over­seas lenders re­port­edly sent let­ters to Jet ask­ing for de­tails of its re­pay­ment plan, given the con­stantly de­te­ri­o­rat­ing fi­nan­cial health of the air­line.

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