US-based bottler PepsiAmericas has announced plans to establish a joint venture with Central America Beverage Corporation (CABCORP) to serve the Caribbean and Central American soft drinks markets. PepsiAmericas will combine most of its Caribbean business (excluding the Bahamas) with CABCORP and take an 18% stake in the venture, leaving CABCORP with an 82% ownership interest. The deal is expected to close in the third quarter of 2009.
CABCORP is a Guatemala-based business and bills itself as the 12th largest company in Central America. The firm is the anchor Pepsi bottler for Central America, covering four countries - Guatemala, Honduras, Nicaragua and El Salvador. Demand for soft drinks in these countries has increased rapidly over the last five years, in line with increased affluence and between 2003 and 2008 CABCORP's sales increased by 60%, representing a compound annual growth rate of 10%. It is this rate of growth which has attracted PepsiAmericas with the company noting that 'the formation of this joint venture will allow us to participate in the higher growth Latin American markets where CABCORP currently operates'.
PepsiAmericas is the world's second largest Pepsi bottler and will throw its Caribbean business into the pot. Here the company operates in five countries - Puerto Rico, Jamaica, Trinidad, Barbados and the Bahamas. The Bahamas is currently serviced from the US and given these existing synergies PepsiAmericas has decided not to include the territory in the deal.
BMI thinks the joint venture is likely to result in only limited operational synergies. The economics of the soft drink industry means that it is usually advantageous to bottle as close as possible to the point-of-sale to limit costly transportation and storage costs. Therefore it is hard to envisage much overlap between PepsiAmericas' business in Jamaica and CABCORP's in Guatemala (for example) which are 1,500km apart.
However, the tie-up will boost the negotiating power of the new entity when plotting expansion in the region. Although PepsiAmericas will be the smaller party in this particular venture it is actually much larger and has very strong ties with PepsiCo (and may soon actually be part of PepsiCo if a recently proposed takeover gets the go ahead). CABCORP will see this as an advantage as it looks to expand across the Central American and Caribbean region. Here the soft drinks market is still fairly fragmented and CABCORP will be looking to put itself in the best possible position to take advantage of the inevitable consolidation process that is likely to see bottlers from other parts of Latin America, eager to stake a claim in the attractive Central American market.