Zimbabwe’s Delta Beverages ponders next move in Coca-Cola disengagement deal

Delta Beverages Limited, Zimbabwe’s largest brewer and Coke bottler is weighing its options on how to navigate an uncertain future after a likely asset separation deal from The Coca-Cola Company (“TCCC”) which could see it give up a third of its operating profits.

The brewer was notified in October by Atlanta-based Coke of its intention to terminate its bottler agreement following the completion of the merger between AB InBev and SABMiller. SABMiller was Delta’s largest shareholder with about 40% stake in the company. In addition, Delta holds a 49% shareholding in Schweppes Zimbabwe. Together they produce and sell Coca-Cola soft drinks under the bottler deal.

Coke announced earlier in October it would exercise its change-of-ownership clause in Coca-Cola Beverages Africa (CCBA) and buy back SABMiller’s 57% stake in the venture, which it hopes to refranchise to one or more of its bottling partners. CCBA was formed in November 2015 between Coke’s South African operations, SABMiller’s Southern African non-alcoholic beverage business and Coca-Cola SABCO. The newly formed Coke bottler began operations on 4th July 2016 and has footprints in over a dozen Southern and Eastern African countries.

With SABMiller’s assets now owned by AB InBev, the top brewer is now Delta’s major shareholder with 38.2% stake.

At an analyst trading update Wednesday in Harare to present Delta’s financials for the six months to 30th September, the company’s management could not provide any answers on how to proceed.

Delta Corporation reported revenue of $246.6m in the six months to September, down 8% from the prior year’s period. Lager volumes fell 11% on prior year as demand shifted to traditional beer and other cheaper alcohol offerings while volumes for Sparkling beverages dropped by 3%.

The trading environment continues to be constrained by consumer spending, limited access to cash and the generally weak macro-economic performance,” Delta said.

Sorghum beer volumes increased by 6% on prior year while contributing 60% to total revenue.

Sparkling beverages contributed 29.32% and 23.45% to the company’s operating income in 2015 and 2016 respectively. It contributed $22.53m in operating income from the $96.1m it made in the 2016 full-year which ended in March.

Coca-Cola does not intend to exit the Zimbabwe market……all involved stakeholders are engaged,” chief executive Pearson Gowero told analysts.

Delta would like to keep its sparkling beverage business, but analysts say signs point to the beverage maker selling off Coke’s related assets.

Finance Director, Matt Valela said: “It is not a Coke-Pepsi issue, AB InBev is beer centric and they are acquisitive,” said Valera.

However, we have other shareholders who own 60% of Delta; therefore our interest must be to defend the value in the hands of that shareholder.

When asked what Delta would do if Coke goes ahead to terminate the bottler’s agreement, Valela responded:

Coca-Cola owns the brands and we own the assets. There are arrangements that are in place, but that is not going to be an optimum solution,” he noted.

On Thursday, Delta announced the appointment of Almeida Cabral De Soares, a representative of AB InBev to its board.

One analyst said that Delta will eventually have to part ways with Coca-Cola, while keeping the alcoholic beverage side of the business.

Another analyst suggested it was possible Delta could sell the sparkling beverages to Econet Wireless owned Mutare Bottling Company, which is the other Coke bottler in Zimbabwe.

A third analyst said Delta could merge its sparkling beverage unit with Schweppes, with AB InBev eventually selling its stake in the enlarged non-alcoholic beverage company to TCCC or TCCC’s bottling partners. This is a move which he said could potentially offer value to all parties. TCCC might be comfortable with the arrangement for as long as there is no AB InBev influence on Delta Beverages and Schweppes Holdings.

But these are not the only problems facing the company. Delta is also facing challenges paying its foreign creditors and shareholders as Zimbabwe grapples with foreign currency shortage.

We currently owe about $30m to both our shareholders and some of our creditors,” said chief executive officer Pearson Gowero at the analyst meeting. He said the company has set aside $120m in cash to repay debt.

We have been in talks with monetary authorities so that we can come up with an amicable solution.

Foreign currency liquidity crisis is driven by low exports, which has prompted the government to delay worker payments. Zimbabwe has been here before. In 2009, it was forced to abandon its own currency to end hyperinflation and now uses mainly dollars, with rands, euros, pounds and other currencies also accepted as legal tender.

Delta said that issues with dollar shortages has delayed it from commissioning new sorghum beer plants in Masvingo and Kwekwe, which it now hopes to do in December, the CEO said. The plants were initially due to be commissioned in October to increase volumes of its flagship Chibuku Super brand.

Delta also faces water shortages which could impact the company’s operations.

There is emerging risk on water supply due to depleted dam and ground water sources. This may lead to disruptions to production,” said Canaan Dube, Delta’s Chairman.

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