--Coke Femsa sees annual capital outlays in Philippines of $120
million-plus
--Room to raise volume sales, improve profitability in market
-CFO
--Philippines's per-capita consumption of Coke products is low
versus Latin America
(Updates throughout to incorporate executives' comments from
conference call)
By Amy Guthrie and Anthony Harrup
MEXICO CITY--Mexican soft-drinks bottler Coca-Cola Femsa SAB
(KOF, KOF.MX) sealed its proposed entry into Asia Friday via an
agreement to buy 51% of Coca-Cola Co.'s (KO) operations in the
Philippines for $688.5 million, with the option to acquire the rest
within seven years.
The acquisition of Coca-Cola Bottlers Philippines Inc. marks
Coca-Cola Femsa's first move beyond Latin America, where it's the
largest Coca-Cola bottler and a frequent investment partner with
the Coca-Cola Co. in a variety of projects.
Coca-Cola's Philippine operations include 23 production plants
and close to 800,000 customers, with expected sales of 530 million
unit cases in 2012, Coca-Cola Femsa said. The country's economic
growth prospects, western habits, preference for Coke products and
young demographics make the Philippines "the best country" for Coke
Femsa to start operating in Asia, Coke Femsa Chief Executive Carlos
Salazar told analysts during a conference call.
Under the agreement, aside from the option to buy the remaining
stake in Coca-Cola Bottlers Philippines, Coca-Cola Femsa has an
option to sell its stake back to the Coca-Cola Co. in the sixth
year after the acquisition, which is expected to close in early
2013. Because of this put option, the Coca-Cola Co. wants to weigh
in on the annual budget and business plans for the Philippine
operation over the next four years, Coke Femsa Chief Financial
Officer Hector Trevino said.
Coke Femsa projects annual capital outlays in the Philippines of
$120 million to $150 million over the next two years, Mr. Trevino
said, while the company hopes to fund those needs at the local
level. The Coca-Cola Co. has infused $600 million of capital into
the operation since 2010, he added. Future capital expenditures
will target bringing some of the bottler's extensive third-party
distribution network in-house, so that the company will have direct
access to customers. Coke Femsa also plans to invest in production
to maximize efficiency and consolidate output at fewer, larger
factories.
Coca-Cola Femsa began looking at the Philippines operations
early last year with a view to an eventual acquisition. The deal
values the entire operation, which has projected sales for 2012 of
$1.1 billion and earnings before interest, taxes, depreciation and
amortization (Ebitda) of $100 million, at $1.35 billion. Coke Femsa
plans to finance the purchase via bank loans, maintaining a
conservative net leverage ratio of 0.7-times.
Annual per-capita consumption of Coke products in the
Philippines, at 129 eight-U.S. fluid ounce bottles, is low versus
many countries in Latin America, but higher than much of Asia. For
comparison, Mexicans consume 728 bottles a year, South Koreans 84
and the worldwide average is 92. In terms of volume sales, the
Philippines is one of Coke's 10 biggest markets.
About 70% of the carbonated beverages consumed in the
Philippines are returnable products, which require complex
distribution networks. Coke Femsa officials said they plan to
promote one-way, disposable packaging in an effort to improve the
business's price mix and profitability. The company also sees room
to raise per-unit prices as Filipinos enjoy greater spending
power.
The Southeast Asian country's economy grew 7.1% in the three
months ended September from a year earlier, making it one of the
fastest-growing economies in Asia. Remittances from Filipino
workers abroad have expanded in the double-digits in recent years,
while young Filipinos at home are enjoying unprecedented
opportunities in services jobs such as at call centers. The
country's median age is 22.
Mr. Salazar said that a whopping 70% of the country's GDP is
driven by domestic consumption, and that 40% of consumption goes
toward food and beverage. With a population of 95 million, the
Philippines is similar in size to Coke Femsa's home market, Mexico.
The company also sees many cultural and structural similarities
between the Philippines, a one-time Spanish colony, and Latin
America.
Coca-Cola's distribution network in the Philippines is
fragmented and concentrated on mom-and-pop retailers, much like the
business in Latin America. Still, the foray represents a major test
for Coke Femsa, Mr. Salazar conceded, as it entails working across
time zones and in a new language, Tagalog.
Credit Suisse analysts said the Coca-Cola company's keeping a
49% stake is positive as it lowers the risk for Coca-Cola Femsa.
"KOF is buying its way into what could potentially become a whole
new Southeast Asian opportunity (very long-term). We think there
are not that many bottlers in a position to have such serious
global aspirations," Credit Suisse said in a note.
Credit Suisse sees the transaction adding about 9% to Coca-Cola
Femsa's overall sales volume, and about 2% to its Ebitda. The
Philippines business' Ebitda margin of 9% is far below the 20%
margin that Coke Femsa reports in Latin America. Mr. Trevino
attributed part of that discrepancy to lost revenue in the
distribution chain, as Filipinos spend $600 million on Coke
products that the bottler is not currently capturing. Bringing more
distribution in-house will help the bottler cut out the middleman
to improve top-line revenue.
Write to Amy Guthrie and Anthony Harrup at
mexico@dowjones.com
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