Buenos Ares Case

In April of 1998, the executives of Buenos Aires Embotelladora S.A. (BAESA) faced a tough decision as to how to properly restructure the company’s debt so that it enables the company to remain solvent and is fair to the creditors and stockholders of the company. BAESA, a Latin America based soft drink bottler and distributor, was the largest franchised bottler for Pepsi-Cola soft drinks in its region. Just three years earlier, the company had recognized revenues of $691 million resulting in annual earnings of $29.8 million and had become Pepsi’s largest distributor outside of the US and Canada. Although recognizing this good earnings growth in 1995, by 1996 the company reported losses of $437 million and had amassed long-term debt of $52.6 million. In 1997 BAESA improved its numbers some what with its losses of $342.7 million and had managed to write down its long-term debt down to $30.6 million. With these financial results and debt that was due soon, the management had to determine a way to keep the company as a going concern, yet satisfy its creditors.

The Soft Drink Market

The franchises bought by companies like BAESA basically allowed the company to produce the product, with “allowed” being the key word here. In the case of PepsiCo, the franchise was required to purchase a flavor concentrate from PepsiCo for a specified price and had market spending stipulations that BAESA also had to meet each year. PepsiCo did help contribute to these marketing campaigns, although the allocation was not given, their contributions of $65.5 million and $30.6 million do seem to be a significant aid. Also under the terms of the franchise agreement, PepsiCo required BAESA to bottle, label, and distribute the Pepsi products in accord to PepsiCo standards, this applied not only to existing products, but to any new products as well. The term of the franchise agreement was generally for 10 years and PepsiCo had the right to terminate the agreement if BAESA went through any management change or any financial concerns like become insolvent or going bankrupt. These were typical stipulations of franchise agreements for the soft drink bottling industry.

The Latin American region represented a key opportunity for PepsiCo during the late 1990s. PepsiCo was attempting to move from a position of primarily strong market share in the United States to more of global market share dominance; ad Latin America was proving to be a key battleground between themselves and their archrival Coca-Cola. PepsiCo currently had a worldwide market share of only 21%, less than half of Coca-Cola’s, and key Latin American countries like Central America, South America, and Mexico represented a population that consumed roughly 3.4 billion gallons of soft-drinks a year. If, through BAESA, PepsiCo were able to begin to capture some of these soft-drink drinkers, the company could begin to make progress towards their goal of