Friday, June 10, 2016 5:26:28 PM
Jun. 8, 2016 4:52 AM ET
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Summary
Coca-Cola and Coca-Cola FEMSA acquire soy based beverage brand AdeS.
Coke Femsa's network and distribution a perfect fit to expand the brand into new territories.
Coca-Cola not sitting back on carbonated beverage declines and continues to acquire new opportunistic companies.
Coca-Cola (NYSE:KO) announced an acquisition last week with its franchise partner Coca-Cola FEMSA (NYSE:KOF). The deal brought a leading soy beverage maker to the portfolio of non-carbonated beverages from the bottling giant. This latest acquisition, while small in dollar terms, is huge in a continued path of diversification and international expansion. Coca-Cola and Coca-Cola FEMSA are both winners here and investors should take note.
(Picture: Coca-Cola)
The Big Deal
Coca-Cola and Coca-Cola FEMSA agreed to acquire AdeS from Unilever (NYSE:UL) for $575 million. The acquired company is the leading seller of soy based beverages in Latin America. Currently, AdeS has a presence in Brazil, Mexico, Uruguay, Paraguay, Bolivia, Chile, Colombia, and Argentina. AdeS was founded in 1988 in Argentina. In 2015, AdeS had sales of $284 million, moving 56.2 million cases.
Coke had gone on to say that the deal "compliments and reinforces our non-carbonated beverage portfolio offer." The deal has high potential to "leverage the Coca-Cola system's route to market". Take a look at the map to see where AdeS currently sells.
(Picture: Coca-Cola FEMSA Presentation)
This acquisition and the continued expansion into non-carbonated drinks is essential for Coca-Cola and its future. Fifteen years ago, stills (non-carbonated beverages) made up less than 10% of Coke's overall revenue. That figure has risen to 25% and is rapidly growing as carbonated soft drinks fall in side by side fashion.
Acquisitions Piling on for 2016
Coke's latest acquisition strengthens an already productive year in diversification and international expansion. Earlier in January, Coke purchased a 40% stake in Chi Ltd, Nigeria's largest juice maker from TGI Group. Plans call for Coke to purchase the remaining 60% not owned within a three year time frame. In April, Coca-Cola agreed to acquire the beverage business of China Culiangwang Beverages, which includes multigrain beverages, for $400.5 million.
The acquisition of the stake in Chi was part of an ambitious plan put forth by Coke to grow sales in Africa. In 2014, Coke announced a plan to invest up to $17 billion in Africa from 2010 to 2020, more than double the amount it spent in the region in the decade prior. Africa is an area of great growth for carbonated and non-carbonated beverages. Soft drink volume growth was up 13% in the region for SABMiller, a large Coke bottler in Africa.
Putting it all in perspective is the fact that Coca-Cola had a 45% market share of the $18.1 billion soda market in the Middle East and Africa regions in 2015, but had only a 3.5% share of the juice market. The highly fragmented juice market of the region is worth $8.0 billion. TGI, the prior owner of Chi, held the number two market share position, trailing only Iran's Alifard Co. Chi has leadership positions in fruit juices, ice tea, snacks, and value added dairy products.
Growth of Non-Carbonated Beverages
My last Coca-Cola centered article focused on milk, another non-carbonated beverage. My 2014 article hit on Fairlife, a brand being rolled out nationwide as part of Coke's VEB (venturing and emerging brands). Co-owned by Coke, Fairlife was a premium organic milk that was aiming to put a dent in the growing market of specialty milks. It also helped that Coke's team that was behind finding FUZE, Nos, Zico Coconut, and Honest Tea was leading the way. Coke promised that someday the premium milk would "rain money" for the company.
Fairlife hit sales of $90 million in 2015. While that doesn't come out as a huge home run, it is nothing to sneeze at. In fact, Fairlife was named a Top 10 Pacesetter in the food and beverage category by IRI. The brand was ranked fourth for new food and beverage products with $87 million in sales. First place was McCafe retail coffee with sales of $173 million for comparison. It takes time to develop new brands from the ground up. Coke still believes Fairlife is a billion dollar brand.
Coke is also bringing milk to India via its ready to drink flavored milk product called VIO. This product features hints of saffron, pistachio, and almond. The initial flavors are "Kesar Treat" and "Almond Delight". Keep an eye on this brand and country expansion as well for the future.
Soda drink consumption is falling fast and a company that relies heavily on the declining trend has to react fast. Coca-Cola continues to be on top of the trend and is diversifying its efforts into still beverages. International acquisitions continue to hit two-fold with increasing still beverage sales and continuing international expansion.
Coca-Cola Wins
On its latest first quarter earnings presentation, Coca-Cola highlighted areas where its strategy was working. Among them were North America, Japan, India, and Mexico. India was mentioned above as a great example of expansion with the new dairy product. Mexico was listed in this slide for seeing "growth across all major categories". The great relationship between Coca-Cola and Coca-Cola FEMSA continues to pay off and this deal strengthens a region already seeing strong non-carbonated growth.
Here is a breakdown of Coca-Cola last fiscal year by region:
Region
Revenue
Operating Income
Eurasia/Africa
$2.5 billion
$987 million
Europe
$5.1 billion
$2.9 billion
Latin America
$4.1 billion
$2.2 billion
North America
$21.8 billion
$2.5 billion
Asia Pacific
$5.3 billion
$2.2 billion
Bottling
$6.7 billion
$0
Total
$44.3 billion
$8.7 billion
While that shows the dollar amounts, I think it's important to show the growth on a constant currency base and also the growth of the non-beverages. The chart shows unit case volume and is on a constant currency basis for the last full fiscal year:
Region
Revenue Growth
Sparkling Bev. Growth
Still Beverage Growth
Eurasia/Africa
+5%
+2%
+6%
Europe
+2%
+1%
+7%
Latin America
+11%
+0%
+4%
North America
+4%
+0%
+5%
Asia Pacific
+0%
+4%
+4%
That paints a much better story of how non-carbonated beverage (stills) growth is shaping up across all the regions. Sparkling beverages are declining in many regions including North America and Latin America, two of the company's most important regions. Latin America saw the lowest still growth, which shows again how important a deal like the one made for AdeS can become as the soy based drinks are expanded through Coca-Cola FEMSA's network and increase the growth rate for non-carbonated drinks in the region.
Take a look at just how dominant Coca-Cola is around the world with this share breakdown from the CAGNY presentation:
· #1 sparkling beverages
· #1 juice beverages
· #1 ready to drink coffee
· #2 energy drinks
· #2 sports drinks
· #2 ready to drink tea
The company has dominant positions but plenty of room for growth, especially with acquisitions and international expansion that take place in the other categories. In stills, Coca-Cola is number one with around 15% global share. In juice, Coca-Cola is number one with less than 20% market share. Coke believes there is lots of room for growth in these growing segments.
Coca-Cola FEMSA Wins
For Coca-Cola FEMSA, this acquisition is incredibly important. Mexico, one of the company's major markets, put a 10% tax on sugar sweetened beverages that has caused sales to fall. Coke FEMSA has a presence in most of the regions already selling AdeS, giving it strong distribution and cross-selling opportunities.
Coca-Cola FEMSA covers portions of following regions:
· Mexico
· Guatemala
· Nicaragua (entire country)
· Coast Rica (entire country)
· Panama (entire country)
· Colombia
· Venezuela (entire country)
· Brazil
· Argentina
· Philippines (entire country)
Coca-Cola FEMSA has dominant positions in its territories and has a massive point of sale network across major chains and smaller retailers. Coca-Cola FEMSA is also partially owned by Fomento (NYSE:FMX), a leading convenience store operator in Latin America, creating even more opportunity here for Coca-Cola FEMSA to expand distribution of AdeS. Coca-Cola FEMSA's two biggest markets are Mexico and Brazil. In Mexico, the company covers 71.9 million customers across 853,000 points of sale. Coke FEMSA has 17 plants and 143 distribution centers across the country.
Here's a look at Coca-Cola FEMSA's 2015 results:
Region
Mexico/Central Amer.
South America
Asia
Revenue (Last 12 Mo.)
$4.6 billion
$4.0 billion
$1.1 billion
Population covered
93.8 million
162 million
101.8 million
Points of Sale
996,773
1,006,206
806,369
% Carb. Soft Drink
74%
83%
88%
% Water
20%
10%
10%
% Non-carbonated
6%
7%
2%
I use this chart to show the massive populations that Coca-Cola FEMSA covers and also the opportunity to grow non-carbonated sales. As mentioned above, Coca-Cola has taken its non-carbonated business from less than 10% to 25% of total sales. All three of these regions have non-carbonated sales at 7% or less over the last 12 months. The addition of AdeS can now be targeted to the massive populations served through the large point of sale network, also factoring in Coke FEMSA's relationship with Fomento, and can add to the non-carbonated portion of the business.
In the first quarter, Coke FEMSA posted revenue growth of 9.1%. The results were led by double digit revenue growth from Mexico and Colombia. Brazil also saw strong market share gains during the quarter. Still beverage transactions were up 8.9% for the company in the quarter, while volume for stills were up 10.3%. Still beverage volume made up 53.3 million cases out of the company's total 8164 million.
Conclusion
Shares of Coca-Cola FEMSA are up 15% in 2016, trading close to 52 week highs of $87.58. The company has seen its share price actually fall 7% over the last five years. Analysts are calling for earnings per share to rise marginally to $3.18 (from $3.11). Estimates for revenue call for a 9.8% decline to $8.6 billion. Analysts see a better picture for fiscal 2017 with estimates of $9.2 billion in revenue (+6.8%) and earnings per share of $3.65.
Coca-Cola shares continue to trade near 52 week and all-time highs, despite worries facing the company's massive carbonated beverage business. In 2016, shares are up 5.5%. That comes after rising only 2% in 2015. Over the last five years, shares are still up only 38%. Analysts see earnings per share falling to $1.94 for fiscal 2016 and revenue falling 4% to $42.5 billion. A dim outlook is also forecasted for fiscal 2017 with earnings per share rising to $2.05, but revenue falling 13% to $37.0 billion. Take these estimates with a grain of salt though as the company's plans to refranchise its entire North American business will lower revenue, but could provide better earnings with higher margins.
It would appear that Coca-Cola FEMSA has the most upside from the latest acquisition. The company operates nearby to most of AdeS distribution network, giving Coke FEMSA a favorable chance to integrate the business into its massive distribution network and also expand it into neighboring territories. Coca-Cola looks enticing too with several 2016 deals already showing the company's focus on pushing the envelope for non-carbonated growth and tackling international growth. I would be a buyer of both stocks at current levels.
Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in KO, KOF over the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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