Delta likely to forgo sparkling beverages business unintentionally
By Respect Gwenzi, 5 years ago
There is enduring uncertainty among investors with regards to the stock market’s most valued and watched company Delta in light of Coca Coca’s notification of its intention to terminate a bottler’s agreement with the local beverages giant. Concerns around the fate of Delta halted a solid rally in the counter which had seen it gain a tremendous 40% in 15 sessions. On Friday Delta dragged the market as it eased by -1.35% after issuing a statement of caution regarding the Coca Cola issue. If it is to see light, the move will have a material impact on Delta’s beverages operation together with that of its associate Schweppes. Delta has notified shareholders of the possible resultant impact advising investors to take caution in the trading of the companies securities. Coca Cola’s intention to sever ties stems from the acquisition of Delta’s parent SAB Miller by the world’s largest brewer AB InBev. On its part AB InBev is a key Pepsi soda bottler in Latin America while SAB Miller is a strategic Coca Cola partner in the Sub Sahara holding a majority of the bottling agreements together with its related companies. . The 2 are most dominant forces in soda beverages business and have a historical rivalry dating to the 1890s. On the deal’s consummation AB In Bev became an indirect shareholder in Delta. Pepsi and Coca Cola’s core businesses are highly concentrated in the soda beverages market despite the former being more diversified. It is estimated that as at 2015 Coca Cola and Pepsi controlled 60% of the non alcoholic beverages market share globally which is split as 40% and 20% respectively Coca cola’s stranglehold on the Sub Saharan market where it has operated as a near virtual monopoly for a very long time is unquestionable. Pepsi has withdrawn from the Sub Sahara twice in the past in 1985 and in 1997 as they failed to crack the Coca Cola monopoly. Beverage Digest an industry watcher once estimated in the early 2000s that Coca Cola controlled 81% of South Africa’s market share compared to about 5% for Pepsi. Several market dynamics have shifted since then with the emergence of emerging markets which may have prompted a bid to refocus operation for PEPSI. It is however out of the subject matter to refer to Pepsi’s plans on the continent because AB InBev which is our focus is a separate entity with much more interest in alcoholic beverages. This focus underpinned its African venture through SAB Miller. The deal was more targeted on the beer making assets of SAB Miller than the beverages side of the business. It therefore diminishes the allure of the sparkling beverages units of SAB. The deal, the largest ever in the consumer industry, would combine AB InBev’s Budweiser, Stella Artois and Corona with SABMiller’s Castle Lager and take it into fast-growing African and new Latin American markets. In the even that AB InBev decides to sell Coca Cola reserves the right to buy back the beverages business ‘operating assets of SAB Miller now controlled by AB In Bev and has clearly stated that they will exercise this right while continuing to scout for potential partners to refranchise CCBA. This can give investors an indication of the fate that awaits Delta since notification has already been extended. What is clear is the fact that Coca Cola will withdraw its bottler’s agreement putting AB InBev in a tight corner and the stake in CCBA and Delta will likely sell at a discount so as to avoid losses. If AB InBev decides to hold the assets after the bottler agreement’s withdrawal then CCBA and Delta will be in for the worst. It either means AB InBev will tap into the PEPSI relations to secure an agreement within the Sub Sahara which they will easily get even so at a discount because of PEPSI’s record of previously failing to break the Coca Cola regional dominance. Pepsi would value partnering a strong player in Sub Sahara. A PEPSI partnership will however not generate half of the value that Coca Cola presently generates holding the assets constant. This will result in a sharp reduction in profitability for Delta and CCBA or even losses. This is because Pepsi’s brands are not as popular in Sub Sahara compared to Coca Cola. The Coca Cola franchise is associated with strong brands such as Coke, Sprite Fanta, Coke Zero and Minute maid which are produced locally by Delta and its associate Schweppes. In our view the best case scenario for Delta and InBev is a buyout by Coca Cola and that effectively splits Delta leaving it with the beer lines of Lager and sorghum and a few insignificant others in the beverages space. What this implies is a resultant streamlining of Delta’s operations in the beer space. AB InBev would likely consolidate Delta’s position by channeling the proceeds to the remaining beer business and a strategic review of operations to a regional thrust with the same being true for CCBA. If this option is pursued Delta would have forgone a business generating $200 million in annual turnover contributing 21% in total annual volumes and this will impact on the bottom line as well as its cash generating capacity. There is no easy substitute for such a quality business that has generated $1 billion in sales over the past 5 years. Over the past 3 years the business has however been recording declining volumes and sales revenue as a result of weak demand in the economy but it remains fundamentally sound. In FY 2016 sparkling beverages recorded a 6% in volumes while in the second quarter volumes grew by 3% although the half year level is 3% down. this signify a recovery in demand in the second quarter. In a bid to stem volumes decline Delta reduced prices across its products and this contributed to 10% decline in sparkling beverages revenue in the FY2016. Delta Sparkling Beverages performance It is imperative to note that Delta has little to no influence in the resultant position regarding the bottler’s agreement. For indicators one has to focus on the strategic thrust of AB InBev as it overrides SAB Miller. Minority shareholders of Delta likewise cannot influence the outcome and focus should be on the resultant structure and its market value.