« PLEKHANOV RUSSIAN UNIVERSITY OF ECONOMICS”
“CASE 2:
DELTA BEVERAGE GROUP, INC.”
Chaplik Anastasia
Chávez Ferreyra Yeshia
Filatova Alexandra
Pinchuk Ivan
Group:
17OMA-01/15ФА
MOSCOW, 2016
Contents
Introduction
1. Current situation and ratio analysis
2. Different scenario’s without hedge
3. Different scenario’s with hedge
Conclusion.
Introduction
In 1994, Delta Beverage Group, Inc. had become an important part of the franchise system of PepsiCo, Inc., this company was originally the Mid-South Bottling Co. until March 1988, when it was purchased in a leveraged buyout led by the Pohlad Family. At the time of the buyout, Pepsi took a 16 percent equity position in the company as well as a portion of preferred stock. It was then that Mid-South was renamed Delta Beverage Group, Inc.
Delta had a very strong line-up of brand names in its stable. Its franchised brands included Pepsi, Mountain Dew, 7 Up, Lipton, YooHoo, Canada Dry and others.
In April 1992, Delta bought a Little Rock, Arkansas, 7 Up bottler for $1.7 million, adding 225.000 cases of sales and $300,000 of operating cash flow. In October 1992, the company entered into a joint venture with Pepsi-Cola/7Up Bottling Group of Louisiana, which added 2, 7 million cases in sales and an extra operating cash flow of $3, 2 million.
After that, the management team had succeeded in increasing operating profits by almost 100 percent, and net income, though remaining negative because of high interest expenses, made steady upward progress. Moreover, for 1991 and 1993, Delta had generated enough cash flow, after capital expenditures and cash interest expenses, to add to its cash balances. Despite the good cash flow and improving profits, Delta was going to be unable to make a scheduled amortization payment on its bank loan without violating an interest coverage or leverage-ratio covenant. Missing a covenant would mean that the company was in technical default on its loans.
To avert defaulting on its debts, Delta reached an agreement with its senior debt holders to convert $30 million of the existing notes into subordinated notes, with interest payable either in cash or in new notes. The remaining $65, 6 million of the senior notes and $23, 8 million of bank debt were retired at par, using proceeds of a new private- placement debt issue of $105 million.
On the other hand, about company operations we can mention that, one of the obligations of holding a Pepsi franchise was that Delta had to buy its concentrate and syrup from PepsiCo only, and then only at prices established by PepsiCo. In addition to the syrup and concentrate, it was necessary for PepsiCo to approve the packaging that Delta used.
The others raw materials Delta needed to manufacture its beverages included water, carbon dioxide, fructose, PET bottles, aluminum cans, closures, premix containers, and other packaging. Many of these materials were bought through a purchasing co-op, the negotiations with aluminum can suppliers were influenced by the price of aluminum on the London Metal Exchange. The price of aluminum cans and PET bottles had historically varied much less than the price of raw aluminum and PET.
In fact, the cost of aluminum cans had been falling, owing, in part , to an increased supply of bauxite, the raw element from which aluminum was produced, and, in part, to the keen competition among can producers that had been faced with excess production capacity.
John Bierbaum, CFO of Delta Beverage Group, had considered the possibility of an "operational hedge" whereby Delta would substitute bottles for cans, action that could increase the profits; however, he concluded that changing the production was not feasible because aluminum cans and PET containers were sold to different market segments.
After a brief summary of the case, below we present which is the problem of the case, the analysis and the conclusion exposed by our group.
Current situation and ratio analysis
From the financial information it can be seen that DBG the market for soft drinks and beverages is close to being saturated. The demand for these products has mainly been on a decline. However, DBG still manages to keep growing, mainly by the acquisitions it has done. The ratios below will help in assessing the current situation of the company in order to set a strategy for the future.