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Expanding global presence with acquisition in South Africa

Varun Beverage Ltd. (VBL) has acquired 100% equity stake in a South African beverage company, ‘The Beverage Company (Proprietary) Ltd.’ (BevCo), for a cash consideration of ~INR13.2b. Key highlights are as follows:

* BevCo revenue for FY23 stood at ~INR16b with estimated EBITDA of INR1.9b (which accounts for ~10%/5% of the incremental revenue/EBITDA).

* The acquisition is priced at an attractive valuation of EV/sales of ~0.8x/0.7x on FY23/FY24E and EV/EBITDA of 6x on FY24E (as per the acquisition guidelines of VBL).

* BevCo clocked sales volume of ~117m unit cases in FY23, with ~85% of sales coming from the company’s own brands (including ~15% from energy drink) and the rest from PepsiCo products.

Acquisition of BevCo marks major advancement in African market

* VBL has expanded its presence in the African market through the acquisition of 100% equity stake in BevCo and its wholly owned subsidiary, Little Green Beverages Proprietary Ltd., for a cash consideration of ~INR13.2b (~ZAR3b). The acquisition is expected to complete by Jul’24.

* BevCo is engaged in the business of manufacturing and distribution of nonalcoholic beverages in South Africa (which includes products licensed from PepsiCo and well as own branded products).

* BevCo revenue stood at ~INR15.9b in FY23, up 13.5% YoY (~12.5% CAGR over FY21-23). Accordingly, the deal is valued at ~0.8x/0.7x of FY23/FY24E sales of BevCo, while VBL is trading at ~9.8 times of its CY23E sales.

* As per the acquisition guidelines of VBL, the acquisition of any territory/subterritory shall be at an EV of under 6x EBITDA vs. EV/EBITDA of ~43.5x for VBL.

* Accordingly, at an EV of ~INR13.2b, BevCo is estimated to generate minimum EBITDA of ~INR2.2b in FY24 (~5% of VBL CY24 EBITDA). Assuming the historical revenue growth rate (~13%) to continue, BevCo is estimated to clock revenue of ~INR18b in FY24 (~10% of VBL CY24 Revenues), which translates to EBITDA margins of ~12%. (Refer exhibit 3)

BevCo – a key player in African market with diversified portfolio

* BevCo has an agreement with PepsiCo to bottle and distribute its products in Southern Africa. It is a sole licensed bottler in South Africa, Swaziland and Lesotho, while it has distribution rights in Botswana and Namibia.

* Apart from PepsiCo franchisee brands, BevCo manufacture and sells products under its own brands such as Refreshhh (high caffeine content drinks), Reboost (energy drinks), Coo-ee (carbonated drinks with unique flavors such as Mango and Cranberry) and JiVE (Lemonade and Soda).

* The company clocked sales volume of ~117m cases in FY23 (PepsiCo products contributed to ~17.4m cases (~15 % of total volumes), energy drinks contributed to ~17.1m cases (~15%), while the rest ~82.5m cases (~70%) of sales volume came from other owned brands.

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