Varun Beverages share price jumps over 17% to 52-week high as South Africa’s Bevco acquisition
Varun Beverages share price rallied over 17% to hit a fresh 52-week high on Wednesday after the company announced the acquisition of South Africa’s Bevco, which analysts believe to be a good value creation opportunity. Varun Beverages shares jumped as much as 17.78% to a 52-week high of ₹1,380.45 apiece on the BSE.
One of the largest franchise bottlers of PepsiCo in the world, Varun Beverages announced that its board of directors approved the acquisition of 100% stake in South Africa’s The Beverage Company Ltd (BevCo) with plans to expand its geographical footprint in Africa.
The proposed transaction at an enterprise level is valued at ZAR 3 billion, or ₹1,320 crore. Acquisition funding shall be a co-investment from a PE fund and remaining through debt raise by the company.
Bevco is engaged in the business of manufacturing and distribution of licensed (PepsiCo Inc.) / own-branded non-alcoholic beverages in South Africa. Bevco has franchise rights from PepsiCo Inc. in South Africa, Lesotho and Eswatini. Further, it also has distribution rights for Namibia and Botswana.
With Bevco’s acquisition, Varun Beverages has access to 10 African nations (including 5 existing nations) and now controls most of southern Africa.
Analysts at Emkay Global Financial Services believe the acquisition multiple at 0.7x CY23E sales is attractive, in-line with the previous acquisitions and provides a 5x-7x value creation opportunity.
South Africa is a large consumption market ($5.4 billion in FY20) but is a relatively mature market with 60-80% urbanization and high per-capita consumption. The-Coca-Cola-Company (TCCC) and local brands hold majority share in South Africa, while Bevco has ~10% volume share through a combination of PepsiCo and its own brands.
“Varun Beverages’ success in SA, in our view, will require marketing investments (ATL/BTL) and product/packaging innovation to influence consumer habits. Presence at magic price points also remains key to increasing market share from regional players. However, proof points of success in Zimbabwe/Nepal (>50% share now after starting from scratch) and VBL’s best-in-class execution strengths give us confidence of share gains in SA as well,” Emkay Global Financial Services said in a note.
It believes PepsiCo’s low penetration in Africa and a sizable mix of regional brands offer it a long-term growth opportunity in the continent. The brokerage estimates PepsiCo’s bottlers cater to 40-45% of the African market (value terms) via its presence in 15 countries, while TCCC addresses the entire African population of over 1.25 billion (>50 countries).
“Besides TCCC, which has a healthy share in most African markets, the other competition is regional and can likely be beaten by improving the affordability, affinity, and availability of PepsiCo’s products, in our view,” Emkay Global said.
Meanwhile, PepsiCo’s wider product portfolio also offers a key advantage. Energy drinks contribute a healthy value share of ~14% in South Africa, which suggests strong demand for the category.
“PepsiCo has built a robust energy-drinks portfolio via the acquisition of Rockstar, its partnership with Starbucks/Bang in USA, and through organic investments in Mountain Dew/Sting. We reckon that a broad-based energy-drinks portfolio across price points should help PepsiCo gain traction in this category in SA,” said the brokerage.
Emkay Global has a ‘Reduce’ rating on Varun Beverages with a target price of ₹1,150 per share. However, consistent outperformance versus peers and value creation in international market geos provide scope for further re-rating, the brokerage firm said.
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Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before taking any investment decisions.
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Published: 20 Dec 2023, 09:23 AM IST
