October 31, 2014

Peso Shock

David Poppe | 7/1/1995
To see how tremors from the Mexican peso devaluation rocked healthy companies in other parts of Latin America, look no further than Boca Raton.

There, in a well-appointed former law office, sits the corporate offices of Buenos Aires Embotelladora S.A., better known as BAESA, which bottles Pepsi-Cola products in southern Brazil, Argentina, Uruguay, Chile and Costa Rica. BAESA is the largest Pepsi bottler outside the U.S. Although it has no operations in Mexico, its spectacular growth was staggered for a time this spring by the peso's problems.

BAESA presents a fascinating study of a Latin American company operating out of South Florida. Though all its operations and all but about two dozen of its 10,000 employees are outside the U.S., the company is managed from Boca Raton by a team led by Charles H. Beach, who once ran the old Coca-Cola bottling operations of Miami-based Wometco Enterprises. In 1987, Beach headed an investment group that included Miami developer Michael Gerrits in acquiring a Pepsi bottler in Puerto Rico. Two years later, he got started as an international Pepsi bottler when his group bought financially troubled 7-Up and Pepsi bottlers in Buenos Aires and formed what is now BAESA. The timing was perfect. In 1991, Argentine President Carlos Menem introduced a new currency plan pegging Argentina's peso to a 1:1 exchange rate with the dollar. Inflation was tamed, and the Argentine economy boomed.

In 1992, BAESA went public in Argentina, issuing $87 million in stock. One year later, the company went public in the United States, raising $138 million by issuing American Depository Receipts (ADRs) listed on the New York Stock Exchange. ADRs are issued by U.S. banks and represent stock in foreign companies.

Management plowed the money into the business, spurring spectacular growth. Since late 1993, BAESA grabbed exclusive rights to produce and distribute Pepsi in Costa Rica, bought bottling operations in southern Argentina and acquired Pepsi-Cola International's bottling operations in Chile and Uruguay. Sales have quadrupled since 1991. For the year ended September 30, 1994, sales were $465 million and net income was $48.9 million.

Last December, BAESA obtained the rights to produce and sell Pepsi products in southern Brazil, which includes the major cities of Sao Paulo and Rio de Janeiro. Earlier this year, it got franchise rights for the territory which includes Brazil's third-largest city, Belo Horizonte.

That has further fueled growth. In 1994, BAESA sold 133.5 million cases of soda, a 70% increase from 1993, with the bulk of its business in the Buenos Aires market. C. Leon Timothy, a BAESA director and senior vice president, says BAESA sold 25 million cases of soft drinks in Brazil in its first quarter, ended March 31. "Before the end of 1995, we will see our total volume in Brazil exceed all the rest of our volume," Timothy says.

As a result of the expansion into Brazil, sales and income figures continue to surge. For the first half of its 1995 fiscal year, BAESA had sales of $366 million and income from operations of $54.7 million.

BAESA is investing heavily to increase Brazilian bottling capacity. "In a period of about four years, from 1994 through 1997, we will have spent close to $800 million in Brazil," says Timothy. Of that, about $600 million will be spent on hard assets, such as bottling plants, and about $200 million on marketing.

Timothy says Brazil is already the third-largest soft drink market in the world, after the U.S. and Mexico. He says Brazilians bought about 1 billion cases of soft drinks in 1994, but are on pace to buy 1.4 billion cases this year, for a 40% growth rate. (In comparison, U.S. consumers buy 8 billion cases per year.) Largely because of the growth in Brazil, Smith Barney soft drink analyst Ronald McKinney estimates BAESA's earnings will grow from $1.47 per ADR (American Depository Receipt) in 1994 to $1.73 this fiscal year, and $2.20 in 1996.

Despite all this, the Mexican currency crisis staggered fast-growing BAESA. In the aftermath of the Mexican peso devaluation, investors feared the Argentine peso might also be devalued from its current 1:1 exchange rate with the dollar. The resulting crisis of confidence caused BAESA's stock to swoon as sales in Argentina fell off sharply. Sales for the quarter ended March 31 were off 8% in Argentina, compared to an 8% gain in the December quarter, and earnings in Argentina were cut nearly in half.

Before the December devaluation, BAESA ADRs had traded in a range between $35 and $39. By January, they were below $30. By early March, they bottomed out at $20.

"There were an awful lot of people who dumped stocks of Argentine companies, including ours," says Timothy. Exacerbating the situation, Argentines began moving their money out of the country. The liquidity crisis grew so severe that BAESA lost an estimated 15,000 accounts in the month of February, most of them street vendors.

But almost as quickly as it came, the Argentine currency crisis seems to be fading. "I think there's already a lot of confidence coming back into the local economy," Timothy says, though he concedes BAESA's Argentine sales remained down in April. Since President Menem's re-election in May, analysts seem to be breathing easier.

"Although BAESA has experienced difficult market conditions in Argentina during the past few months ... we feel that the positive political developments in [Argentina] will help consumer goods companies post better results going forward," McKinney wrote shortly after the presidential election.

Already, BAESA's market value has rebounded, trading recently at about $32 per ADR. Timothy hopes the Argentine currency crisis turns out to be a fierce but short-lived storm.

The moral of the story? Posits Timothy: "If the world decides the sky is falling in a country, there's not a whole lot you can do."

Tags: Florida Small Business, Politics & Law, Business Florida

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