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

Business World - - Corporate News - Jan­ina C. Lim

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. —

Newspapers in English

Newspapers from Philippines

© PressReader. All rights reserved.