The stake purchase in Coca-Cola’s wholly owned bottling arm in India is poised to be the biggest investment by the promoters of the pizza-to-pharma conglomerate, as they explore multiple avenues.
Family members are in active discussions with Apollo Global Management, Ares Management, Bain Capital and Kotak Alternate Asset Managers to raise at least a third of the amount, or ₹4,000-5,000 crore ($475-595 million), said three people aware of the matter.
Minimum Returns Key
Shamit Bhartia, non-executive director of Jubilant Industries, is leading these talks.
This structured instrument—either a compulsorily convertible preference share or convertible debenture—is likely to be for three years, with a minimum return threshold.
Coca-Cola plans to list HCCB, and is looking to replicate the asset-light, value-unlocking initiative by rival PepsiCo, said the people cited above. The stake sale is seen as a precursor, aiding in price discovery.Key to the structured deal will be negotiating minimum returns, linked to the planned listing of HCCB for an exit. The initial public offering (IPO), expected in the coming years, will follow a waterfall mechanism, with senior secured lenders getting priority on repayment.
If treated as a quasi-equity instrument, these deal terms may not include a coupon as is typical of debt trades. They are also unlikely to have any security based on shares of the group’s listed companies such Jubilant Foodworks, India’s largest food services company, which has the exclusive franchise for Dunkin’ Donuts and Popeyes as well as Domino’s Pizza in India and a few other geographies.
ET was the first to report on September 19 that the Bhartias have been shortlisted by Coca-Cola, beating a rival bid by the Burman family of Dabur, to partner them in India in their bottling operations, which has been growing on the back of increased consumption of beverages, including colas. Both parties signed an exclusivity agreement for bilateral negotiations, ET had reported.
The Bhartia family office didn’t respond to queries. Ares and Apollo declined to comment while Bain and Kotak did not respond to queries sent on Saturday.
Morgan Stanley to MFs
In parallel, discussions are also ongoing to raise a tranche of three- to five-year debt from mutual funds. Investment bank Morgan Stanley is exclusively working with the New Delhi-based Bhartia family on this. The Wall Street bank was also the buy-side advisor in the negotiations. It’s not clear if it will part-finance the deal from its balance sheet and then sell down to other investors in the bank market, MFs or insurance companies.
The plan is to create a separate special purpose vehicle (SPV), which, in turn, will own 40% equity in HCCB.
Potential investors and financiers are betting on the underlying strength and cash flows of HCCB, said people aware of ongoing discussions, which are expected to continue till end of the calendar year.
“Mutual funds through AIFs (alternative investment funds) are participating in funding acquisitions as AIFs have stable, patient capital with a longer lock-in, without a redemption facility,” said Ajay Manglunia, debt capital market expert. “Once the money is invested, it stays with the fund, which is expected to generate better yields. Unlike mutual funds, which offer daily NAV-based redemptions, AIFs can target higher yields over longer periods, helping them to support structured finance, which mutual funds have been unable to address post the IL&FS crisis.”
Coca-Cola is said to have dissuaded the Bhartias from bringing on board a traditional private equity investor to offer growth equity, even though approaches were made to several US firms to join forces, said the people cited above. That nudged the Bhartia family to tap Apollo, Bain and a few others to be part-financiers, but with structures that will make them co-investors.
“Coke has been very demanding about who can partner them,” said an executive. “Players like Bain or Apollo will be treated just below the senior lenders in the waterfall structure. Further clarity will emerge by December about the final contours and the final quantum from the different set of investors and lenders.”
The Bhartia family is also looking to invest ₹4,000-4,500 crore and has been in discussions with the likes of HSBC, Standard Chartered Bank, Deutsche Bank, Barclays and Citi to explore credit lines.
The family doesn’t favour loans against promoter group shares in group entities, said people with knowledge of the matter.
“Private credit funds looking at the Rs 4,000-crore mezzanine deal are expecting returns upwards of high teens, driven by a base return and upside sharing,” said one of the persons cited.
The structured finance approach in the Coca-Cola-Jubilant deal offering upside returns for investors, involving mezzanine debt or equity and funding at 10-12%, mirrors the financing framework used in Matrix Pharma’s acquisition of Viatris’ API business that was funded by Kotak Alternate Asset Managers in June.
Growing fizz
Competitive intensity in soft drinks has shot up in recent months, with Reliance Consumer Products Ltd (RCPL) undertaking disruptive pricing, more aggressive trade margins and distribution scale up for Campa. RCPL is selling Campa at Rs 10 for 200 ml bottles, while Coca-Cola and PepsiCo are selling 250ml bottles for Rs 20 each. Campa’s 500 ml bottles are priced at Rs 20, significantly lower than the Rs 30 and Rs 40 that Coca-Cola and PepsiCo sell at for the same bottle sizes. PepsiCo’s bottling partner Varun Beverages Ltd said earlier this month that it plans to raise Rs 7,500 crore from the market through Qualified Institutional Placement (QIP) route to fund its growth plans. HCCB too is lining up a $1.5 billion capital expenditure programme over 5 years to invest in additional bottling lines, chillers. Coca-Cola and PepsiCo have so not dropped prices upfront, but have stepped up tactical promotions at local retailers, engaging in cross-promotions, and cross-bundling on quick commerce platforms.
““A new player coming in with a different price point disrupts the industry,” said Tata Consumer Products Ltd (TCPL) managing director Sunil D’Souza last Friday, in response to an analyst query on the impact of Campa Cola on the overall beverages sector. “While (the Rs 10) price was the same to the consumer, the trade price was dramatically different. So, the other big multinationals adapted their pricing on the trade very, very quickly. We did not.” TCPL reported that revenue for its ready-to-drink business dropped 11% year-on-year in the July-September quarter, which it attributed to unfavourable weather and competitive pricing.
