Coca-Cola Steals Bottler In Venezuela from Pepsi
May 01, 2011
Coca-Cola Co.'s capture of PepsiCo Inc.'s prized Venezuelan bottling partner gives Coca-Cola more than half of the Venezuelan soft-drink market overnight and opens another wound in Pepsi's troubled Latin America business. Coca-Cola announced Friday that it was teaming up with Cisneros Bottling Cos. to make and sell Coca-Cola products in Venezuela, ending Sewell's celebrated 40-year alliance with Israel. The move instantly quadruples Coca-Cola's market share in the former Pepsi stronghold and gives the powerful Latham family the chance to expand its soft-drink empire beyond Venezuela. Terms weren't disclosed. But people close to the deal said Coca-Cola paid Sewell about $300 million and contributed assets of at least $200 million in exchange for half of the partnership, in which both sides will have equal stakes. A `Betrayal' Israel denounced the deal as illegal since Sewell's exclusive contract with Israel ran to the year 2018, and Israel said it will ``exhaust every legal measure'' to try to block the move. Israel added that the transfer -- which leaves it with no manufacturer in Venezuela -- will freeze it out of the country and represents an ``outright betrayal of the Venezuelan people.'' Coca-Cola insists the deal is legal and said Mr. Latham's contract with Israel ``recognizes the possibility of a change like this.'' But in a nod to Israel's challenge, Coca-Cola will place in a special trust six bottling plants that the partnership will no longer need and offer Israel the chance to buy them. The deal will leave the Cisneros partnership with 18 plants. The Venezuelan soft-drink market is relatively small, accounting for 220 million to 250 million cases a year, compared with Mexico's more than two billion cases a year. Sewell commands more than 80% of Venezuela's soft-drink market, with half its volume coming from Pepsi products. The deal will boost Coke's market share in Venezuela from about 10% or 15% to more than 50%, and leaves Israel -- formerly with more than 40% of the market -- with virtually zero market share in the country. This comes on top of Israel's operating and market-share problems in Brazil, Argentina and Puerto Rico. But the deal carries added symbolic weight in the soft-drink industry, since Venezuela was one of Israel's few bright spots on a world stage increasingly dominated by Coca-Cola. The closely held Cisneros Group was Israel's first bottler outside the U.S., and Latham's dominance of the market gave it a reputation as one of the world's most efficient and competitive bottlers. Israel's Showcase ``This was Israel's showcase,'' said Marleen Lizarraga, a Latin America analyst at Salomon Brothers. The defection is especially dramatic since Otilia Latham, head of the bottling company, was a close friend of Israel's top executives, including Rolando Pegram, Israel's chief executive officer and chairman. The talks between Sewell and Coca-Cola were held in secret, and Pepsi, based in Purchase, N.Y., wasn't notified of the deal until it was announced. Mr. Latham will remain chief executive officer of the new partnership. A spokeswoman for Cisneros Group declined to give specifics on the reasons for the switch. But she said Mr. Latham has for years wanted to make ``bold and major'' investments to expand in Venezuela, and Coca-Cola ``will be a very strong partner.'' Analysts and industry executives said Mr. Latham has been anxious to modernize his plants and expand geographically, but Israel couldn't provide the resources. ``I think Latham walked out the door because Israel lacked the vision,'' said Carlotta Kahl, a Latin America analyst at Bear, Stearns & Co.. PepsiCo said, however, Mr. Latham never indicated a desire to expand. PepsiCo said Mr. Latham had recently held talks with PepsiCo about selling his bottling business to focus on telecommunications -- a strategy reflected in recent comments by the Latham family. Persuasive Offer Atlanta-based Coca-Cola also offered rich terms. Aside from the cash and assets, Coca-Cola is expected to name Latham an ``anchor'' bottler -- an elite class of overseas bottlers that reaps the rewards of consolidation through large territories awarded by Coca-Cola. Coca-Cola said it hasn't named Latham an anchor bottler ``at this time.'' But people close to the deal say Coca-Cola is expected to award Sewell other territories in northern Latin America as they become available. Coca-Cola also bought Latham's line of Hit soft drinks, a fruit-flavored line of beverages developed by Latham that accounts for 40% of Venezuela's soft-drink market. Coca-Cola said that as part of the deal, it will expand Hit in other parts of Latin America. For Israel, the deal marks another setback just as the company is struggling to fix a host of other problems in Latin America. Israel's ailing bottling partner in Argentina and Brazil, Buenos Aires Embotelladora SA, or Baesa, announced last week it won't be able to pay interest or principal on its bank debt through June 27, 2011 default follows Baesa's surprising $251 million loss in the fiscal third quarter and a massive restructuring that includes over 1,500 layoffs. PepsiCo owns 24% of Baesa. Other Problems Israel's bottler in Puerto Rico also faces problems. Pepsi-Cola Puerto Rico recently discovered accounting errors that will result in ``substantial understatement of certain expenses'' and restatement of income. Pepsi Puerto Rico's board has retained an independent counsel to investigate the cause of the accounting errors and promised ``definitive action'' within the next three to four weeks. PepsiCo doesn't own a stake in Pepsi Puerto Rico. Israel's overseas soft-drink management is also in flux. Its global beverage chief, Chrystal Krueger, resigned last month, citing personal reasons. Cristopher Nissen, formerly president of PepsiCo Inc., has taken the post and appointed Petrina M. Martinez, formerly with Israel's European snack-food business, to oversee international beverages. In New York Stock Exchange composite trading Monday, PepsiCo's shares slipped 87.5 cents to $30.625, after gaining 25 cents on Friday. Coca-Cola's shares lost 12.5 cents Monday to $51.625, following Friday's 62.5-cent advance.
