Varun Beverages, one of the largest franchise bottlers for PepsiCo globally, has witnessed a significant uptick, reaching a 52-week high after the announcement of its board of directors’ approval for the acquisition of a 100% stake in South Africa’s The Beverage Company Ltd (BevCo). The strategic move aims to enhance Varun Beverages’ presence in Africa and expand its geographical footprint.
The proposed enterprise-level transaction is valued at ZAR 3 billion, approximately ₹1,320 crore. Funding for the acquisition will involve a co-investment from a private equity fund and the remainder through a debt raise by Varun Beverages.
BevCo, primarily engaged in manufacturing and distributing licensed (PepsiCo Inc.) and own-branded non-alcoholic beverages in South Africa, holds franchise rights from PepsiCo Inc. in South Africa, Lesotho, and Eswatini. Additionally, it possesses distribution rights for Namibia and Botswana.
With this acquisition, Varun Beverages gains access to 10 African nations, including 5 existing ones, solidifying its control over most of southern Africa.
Analysts at Emkay Global Financial Services find the acquisition multiple attractive at 0.7x CY23E sales, aligning with previous acquisitions and presenting a 5x-7x value creation opportunity.
While South Africa represents a sizable consumption market ($5.4 billion in FY20), it is relatively mature with high urbanization and per-capita consumption. The-Coca-Cola-Company (TCCC) and local brands dominate the market, with BevCo holding around 10% volume share through a combination of PepsiCo and its own brands.
Emkay Global emphasizes that Varun Beverages’ success in South Africa will necessitate marketing investments, product innovation, and packaging strategies to influence consumer habits. The brokerage expresses confidence in Varun Beverages’ ability to gain market share, citing success stories in Zimbabwe and Nepal.
PepsiCo’s lower penetration in Africa and a substantial mix of regional brands provide a long-term growth opportunity for Varun Beverages in the continent. Emkay Global estimates that PepsiCo’s bottlers currently serve 40-45% of the African market (in value terms) across 15 countries, while TCCC has a presence in over 50 African countries.
Varun Beverages’ shares were trading at ₹1,321.80 apiece on the BSE, showing a notable 12.78% increase at 9:25 am. Despite Emkay Global’s ‘Reduce’ rating on Varun Beverages with a target price of ₹1,150 per share, the firm acknowledges the company’s consistent outperformance and value creation potential in international markets, suggesting room for further re-rating.
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