Coca-Cola FEMSA’s sale of PHL operations ‘credit positive’ — Moody’s

COCA-COLA FEMSA S.A.B. de C.V.’s decision to sell its stake in bottling operations in the Philippines has been deemed a credit positive by Moody’s Investors Service, as the proceeds are expected to be used to reduce the company’s debt.

Earlier this month, Coca-Cola FEMSA said it is selling its controlling stake in its Philippine unit, Coca-Cola FEMSA Philippines, to the Coca-Cola Co., which will take over operations via Bottling Investments Group (BIG).

Coca-Cola FEMSA estimated the transaction to yield an enterprise value of $700 million, in line with the $688.5 million it paid for the stake in 2013.

“Considering that the company will use at least part of the proceeds to reduce debt, the sale is credit positive for (Coca-Cola FEMSA) because it further supports its plan to de-lever. If (CocaCola FEMSA) fully uses the proceeds to reduce debt, the company’s adjusted total debt/ EBITDA would decline on a pro forma basis to 2.0x from 2.5x as of the end of June 2018,” Moody’s Investors Service said in an August 23 Credit Outlook report.

Last year, Coca-Cola FEMSA issued 10 billion Mexican pesos ($520 million) in local notes to pre-fund the $445 million maturity of a Yankee note slated mature in November 2018. Additional debt payments include $500 million due in February 2020 and $900 million due in November 2023, both of which relate to the Yankee bond.

“If (Coca-Cola FEMSA) does not use the proceeds to reduce leverage, at least partially, Moody’s-adjusted leverage will remain close to 2.4 times at year-end 2018 because of additional debt incurred to fund acquisitions in Guatemala and Uruguay,” Moody’s said.

“Also affecting (Coca-Cola FEMSA) credit metrics will be the sale of the Philippines operation and sharp depreciations of Brazil’s and Argentina’s currencies. Although leverage would be higher than our expectation, (Coca-Cola FEMSA’s) already-strong liquidity would be enhanced,” it added.

As of end-June 2018, the company’s cash on hand stood at 23.5 billion Mexican pesos ($1.2 billion) which covers two times its short-term debt.

Coca-Cola FEMSA’s exit from the Philippines is attributed to the excise tax on sweetened beverages implemented at the beginning of the year. The country imposed a P6 per liter tax on beverages with sugar or noncaloric sweeteners and a P12 per liter tax on drinks containing high fructose corn syrup.

“The Philippines’ strong economic growth, which has averaged 6% annually over the past 10 years, has allowed the demand for products subject to excise duties to be somewhat inelastic. However, the materiality of the change, coupled with the low purchasing power of the population (less than $3,000 GDP per capita), has severely affected (Coca-Cola’s) volumes and profitability,” Moody’s said.

The debt watcher noted Coca-Cola FEMSA’s output in the Philippines during the first six months of the year dropped 5.8% from a year ago while its operating income declined 44% year on year. The Philippines accounted for some 13% of its consolidated revenue and 7.5% of its earnings before interest, taxes and amortization (EBITA).

“Therefore, we estimate that on a pro forma basis, (Coca-Cola FEMSA’s) EBITA margins will improve to close to 15.2% from 13.8% for the last 12 months that ended in June 2018,” Moody’s said.

The debt watcher also flagged a “more adverse” business climate for the soft drinks companies, as more countries are imposing taxes on sugar-sweetened beverages. After the Philippines, the United Kingdom, Peru and Ecuador are also slapping taxes on soft drinks.

“This means that innovation and product diversity will remain key factors when assessing credit risk in this industry,” Moody’s said.

“Despite (Coca-Cola FEMSA’s) exit from the Philippines, management made clear that it will continue to pursue expansion opportunities, including in Asia, and we expect the company to do so prudently,” it added. —