Pepsi In Cuba

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How attractive to PepsiCo is the proposal to buy 30% of Deltex for 1.1B pesos (US$360M)? Based on the information in the case, Pepsi could invest US$360 million in exchange for 30% equity of Deltex. So we have to calculate the value of 30% equity of Deltex. First, we calculated the discount factor by using average unlevered beta of US independent bottlers, US 10 year Treasury bond as risk free rate and assuming market risk premium 10%. We came up with 9.83% of WACC. Next, we calculated Deltex free cash flow and terminal value and then converted them into US dollar value. Now with WACC and total cash flow, we had NPV of the company. So we deducted current debt from NPV and came up with the value of US$360M investment equal to 59.99% of Deltex equity. So the proposal to buy 30% of Deltex with US$360M is too expensive to PepsiCo and not attractive to PepsiCo. If we look at the sensitivity analysis, we find as WACC increases, the percentage of US$360M investment in Deltex also increases. When WACC is 5.8%, the percentage of US$360M investment in Deltex is equal to 30% equity of Deltex. WACC Percentage of Equity 4% 19.35% 6% 31.35% 8% 45.25% 10% 61.44% 12% 80.39% 14% 102.69% 16% 129.18% 18% 160.96% 6. As Suarez, would you invest in the Sanchez/ Deltex joint venture as proposed in the case? Why or why not? Can you suggest a joint venture arrangement that is more attractive to both PepsiCo and Deltex? In deciding whether to invest in Deltex, we have to consider some advantages and disadvantages of this deal first. Advantages and Opportunities for Pepsi a. Pepsi needed a strong regional partner. Pepsi had been falling behind to Coke in Mexican market. However, changes in the regulatory environment had cut Coke’... ... middle of paper ... ...nties there would be in the joint venture. Overall, we think advantages outweigh disadvantage but Sanchez should revise the proposals. First he should raise the equity percentage that Pepsi can receive. Depending on WACC, we propose to increase to 40%. Second, regarding to management, Deltex was long time Pepsi’s bottler and their relationship had worked well in the past years. However, with such big investment, we think Pepsi should take measures to ensure its strategies were taken. Those measures included Deltex should report its operations and strategies to Pepsi on the monthly basis, Pepsi should reserves the right to appoint half of the Deltex board of directors and CFO or other key personnel except operating managers. Also, Pepsi should be given a right of first refusal to any transaction in which Sanchez was to sell his shares as in Gallardo joint venture.

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